World Financial SysteWorld Develop

Devms andment In

elopment Report 1989 Developmentdicators

/ /

/ I World Development Report 1989

Published for The World BankOxford University Press

Oxford University Press

NEW YORK OXFORD CORBY LONDON TORONTONEW DELHI BOMBAY CALCUTTA MADRAS

SELANGOR SINGAPORE HONG KONG TAIPEITOKYO BANGKOK KARACHI LAHORE MELBOURNEAUCKLAND CAPE TOWN JOHANNESBURG DURBAN

NAIROBI DAR ES SALAAM KAMPALAJAKARTA IBADAN

© 1989 by the International Bank

for Reconstruction and Development / The World Bank

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First printing June 1989

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This Report is the twelfth in the annual series as-sessing major development issues. Like its prede-cessors, the Report includes the World Develop-ment Indicators, which provide selected social andeconomic data for more than a hundred countries.Chapter 1 reviews recent trends in the world econ-omy and their implications for the future prospectsof developing countries. Chapters 2 through 9 ex-amine the role of financial systems in develop-ment, the special topic of this year's Report. Themain points of the Report are summarized below.

Economic growth rates among the developingcountries have varied considerably. In Asia, wherethe majority of people live, per capita incomes dur-ing the 1980s have risen more rapidly than in the1960s and 1970s, but in Latin America and the Ca-ribbean, Europe, the Middle East, and North Af-rica per capita incomes have risen by less than 1percent a year, and in Sub-Saharan Africa theyhave actually declined. The external environmenthas had an adverse impact on growth, but domes-tic policies have been more important. Countriesstriving to adjust their economies have had consid-erable success in reducing external imbalances butless success with internal balance. In the first halfof the 1990s, per capita incomes are expected toincrease only slowly in Sub-Saharan African coun-tries. The highly indebted countries will growmore rapidly, particularly if there are reductions intheir external debt. Growth is expected to slow

among Asian countries, although per capita in-comes will continue to rise rapidly.

The decline in foreign capital inflows means thatcountries will need to rely primarily on domesticresources to finance investment. Financial systemscan play an important role in this regard: by mobi-lizing savings and allocating them to the mostprofitable activities, the financial sector enables so-ciety to make more productive use of its scarceresources. The financial systems of many develop-ing countries are in need of restructuring, how-ever. Their present condition reflects the approachto development taken by many countries in the1960s and 1970s, an approach that emphasizedgovernment intervention to promote economicgrowth. Today many countries are revising theirapproach to rely more heavily on the private sectorand on market forces. For the financial sector thisimplies a smaller role for government in the alloca-tion of credit, the determination of interest rates,and the daily decisionmaking of financial interme-diaries. Relaxation of these economic and opera-tional controls calls for an effective system of pru-dent regulation and supervision. In most countriesimprovements in the legal and accounting systemswill be required to strengthen the financialstructure.

The industrial and financial policies followed inthe 1970s and 1980s, together with the economicshocks of the 1980s, have left many developing

'U

countries' financial institutions insolvent. Still,many institutions continue to lend to their mostimpaired customers and to accrue unpaid interest.The allocation of scarce resources to insolventfirms has delayed adjustment. Restructuring theinsolvent firms and institutions is an importantpart of the adjustment process.

Restructuring the financial system provides aunique opportunity to reconsider what sorts of in-stitutions will be best suited to the economic envi-ronment of the 1990s. Although commercial bankswill continue to dominate financial systems inmany developing countries, greater emphasis thanin the past should be placed on ensuring the avail-ability of a broad array of financial services. Manycountries should develop contractual savings sys-tems, and the more advanced should develop se-curities markets. Governments should provide atax and regulatory environment that is neutralwith regard to different types of financial activities.Informal financial institutions have proved able toserve the household, agricultural, and microen-terprise sectors on a sustained basis. Measures thatlink informal institutions to the formal financialsystem will improve that service and ensure a com-petitive environment.

In recent years some countries have experi-mented with varying degrees of financial liberali-zation. Their experience with both domestic liber-alization and full or partial decontrol of the capitalaccount has been mixed. Nevertheless, it suggests

iv

that the pace and sequencing of liberalizationshould depend on the initial structure of a coun-try's financial system and the degree of macroeco-nomic stability. Countries with unstable econo-mies and price systems that do not reflect thescarcity of resources will need to deregulate theirfinancial systems gradually. In countries withoutfully liberalized markets, policymakers shouldmake sure that interest rates reflect market forcesand that directed credit programs are limited to amodest share of total credit. When a country lacksmacroeconomic stability, decontrol of external fi-nancial transactions may cause destabilizing capi-tal flows. Hence, although the objective is an openmarket, countries should not remove all capitalcontrols until other economic and financial reformsare in place.

Like previous World Development Reports, thisis a study by the staff of the World Bank, and thejudgments in it do not necessarily reflect the viewsof the Board of Directors or the governments theyrepresent.

13. CJ&Barber B. ConablePresidentThe World Bank

June 1, 1989

This Report has been prepared by a team led by Millard F. Long and comprising Yoon Je Cho,Warren L. Coats, Jr., Eirik Evenhouse, Barbara Kafka, Catherine Mann, Gerhard PohI, Dimitri Vittas,Robert Vogel, and Robert Wieland. The team was assisted by Anastasios Filippides, Lynn SteckelbergKhadiagala, Clifford W. Papik, Anna-Birgitta Viggh, and Bo Wang. The work was carried out underthe general direction of Stanley Fischer.

Many others in and outside the Bank provided helpful comments and contributions (see the biblio-graphical note). The International Economics Department prepared the data and projections pre-sented in Chapter 1 and the statistical appendix. It is also responsible for the World DevelopmentIndicators. The production staff of the Report included Les Barker, Pensri Kimpitak, Cathe Kocak,Victoria Lee, Walton Rosenquist, Nancy Snyder, and Brian J. Svikhart. Library assistance was pro-vided by Iris Anderson. The support staff was headed by Rhoda Blade-Charest and included TrinidadS. Angeles and Maria Guadalupe M. Mattheisen. Clive Crookwas the principal editor.

Definitions and data notes ix

Financial systems and development: an overview 1

The economic background 1

Origins of financial distress 2

Prerequisites for financial development 3

Institutions and markets 3

The path to reform 4

Outline of the Report 5

Adjustment and growth in the 1980s and 1990s 6

The international economic environment 6

Structural adjustment policies and challenges 10

Development issues 14

Growth prospects 19

2 Why does finance matter? 25

Finance and growth 26Risks and costs of finance 32Government intervention 35The structure of the financial system 37

3 The evolution of financial systems 41

Development of payment systems 41

Development of trade finance 42The impact of large-scale industrialization 44

Financial crises 45Financial systems in developing countries 47Financial regulation after World War II 49Financial innovation since the 1970s 51

Current policy concerns in industrial countries 52

V

4 Financial sector issues in developing countries 54

Government intervention in credit allocation 55Macroeconomic policies and financial development 61

The task of financial reform 69

5 Financial systems in distress 70

Economic consequences of financial distress 72Roots of financial distress 75

Lessons of financial restructuring 77

6 Foundations of financial systems 84

Financial contracts and debt recovery 84Developing the legal foundations 85Timely and accurate accounts 90Prudential regulation of financial institutions and markets 91

7 Developing financial systems 96

Financing investment 96

Building financial institutions and markets 102Priorities for reform 111

8 Issues in informal finance 112

Informal financial arrangements 113Semiformal finance 116

Improving finance for the noncorporate sector 118

9 Toward more liberal and open financial systems 122

Recent experiences with financial reform 122Lessons of reform 127Components of financial reform 128Conclusions of the Report 132

Bibliographical note 133

Statistical appendix 145

World Development Indicators 155

Boxes1.1 Project 1992 and the developing countries 161.2 Debt concepts 181.3 Foreign equity investment 242.1 Life without money 262.2 Transaction costs and the supply of credit 302.3 Real interest rates and growth 322.4 Swapping risk 342.5 Deposit insurance 362.6 Monetary policy 383.1 Marco Polo discovers paper money 423.2 Trade financing in Renaissance Italy 433.3 Financial swindles 463.4 Financial underdevelopment in Nigeria 483.5 Indigenous banking in India 483.6 Universal banking 504.1 Directed credit in Turkey 564.2 Lending program for small enterprises in Ecuador 58

vi

4.3 Credit and income redistribution in Costa Rica 59

4.4 The Botswana Development Corporation 60

4.5 The inflation tax 63

4.6 Taxation of financial intermediation in the Philippines 64

4.7 The curb market 674.8 Financial indexation in Brazil 68

5.1 Examples of financial distress 71

5.2 Bank solvency and liquidity 73

5.3 How good bankers become bad bankers 77

5.4 The U.S. savings and loan crisis: the lessons of moral hazard 78

5.5 Can banks "muddle through"? 79

5.6 Restructuring a large corporation: a Mexican example 83

6.1 Civil and commercial law in Korea 86

6.2 Financial and economic effects of land tenure in Thailand 87

6.3 Islamic banking 88

6.4 Commercial law enforcement in Pakistan 89

6.5 Elements of a bank supervision system 92

6.6 Investment funds in Egypt 94

7.1 The structure of investment and the capital stock 97

7.2 Corporate finance in theory and practice 99

7.3 The financial history of a Pakistani firm 100

7.4 Housing finance 102

7.5 Bank modernization: Indonesia's experience 104

7.6 Banks in Guinea 105

7.7 Pension funds as a source of term finance 107

7.8 Capital markets in India 108

8.1 Informal finance in Niger 113

8.2 Rotating savings and credit associations 114

8.3 The Grameen Bank: an alternative approach to noncorporate finance in Bangladesh 117

8.4 The Badan Kredit Kecamatan: financial innovation for the noncorporate sector in Indonesia 120

9.1 Financial liberalization in New Zealand 125

9.2 Financial reform in Korea 126

Text figures1.1 Growth of real GNP in developing countries by region, 1965 to 1988 7

1.2 Real GNP per capita in developing countries by region, 1965 to 1988 7

1.3 Growth of output and trade, 1980 to 1988 9

1.4 Growth of export volume in developing countries by region, 1965 to 1988 10

1.5 Real commodity prices, 1970 to 1988 11

1.6 Saving and investment rates in developing countries by region, 1965 to 1987 12

1.7 Real effective exchange rates in developing countries by region, 1978 to 1988 17

1.8 Domestic and external liabilities in selected developing countries, 1975, 1981, and 1987 22

2.1 Average saving and investment rates and sectoral surpluses and deficits for fourteen developingcountries 28

2.2 Indicators of financial depth 31

3.1 The evolution of financial assets in selected countries, 1800 to 1987 45

4.1 Central government borrowing by source, 1975 to 1985 62

4.2 Real interest rates in developing countries and the United States, 1967 to 1985 65

4.3 Financial savings and the real deposit rate in Argentina and Thailand, 1970 to 1987 66

4.4 Prices, production, and bank credit in Colombia 69

5.1 Ratio of new credit to investment in selected developing countries, 1973 to 1979 and 1980to 1986 74

5.2 Central bank losses and new domestic credit in selected developing countries, 1980 to 1987 75

vii

7.1 Shares of medium- and long-term credit in total credit outstanding from commercial banksand other financial institutions in selected developing countries, 1970 and 1986 98

7.2 Stock indexes in selected developing countries and the United States, 1987 and 1988 110

Text tables1.1 Selected economic indicators in the adjustment-with-growth and low scenarios 201.2 Growth prospects in the adjustment-with-growth and low scenarios 211.3 Selected capital flows to developing countries, 1981 and 1987 232.1 Saving and growth in developing countries, 1965 to 1987 272.2 Average sectoral surpluses in fourteen developing countries, selected years 292.3 Growth rates and other economic indicators for country groups with positive, moderately

negative, and strongly negative real interest rates, 1965 to 1973 and 1974 to 1985 312.4 The institutional structure of selected financial systems, 1985 394.1 Average annual inflation rates, 1965 to 1987 634.2 Real loan interest rates for selected countries, 1980 to 1986 667.1 Equity market indicators, 1987 109

Statistical appendix tablesA.1 Population growth, 1965 to 1987, and projected to 2000 145A.2 Population and GNP per capita, 1980, and growth rates, 1965 to 1988 146A.3 Population and composition of GDP, selected years, 1965 to 1988 146A.4 GDP, 1980, and growth rates, 1965 to 1988 147A.5 GDP structure of production, selected years, 1965 to 1987 148A.6 Sector growth rates, 1965 to 1987 148A.7 Consumption, investment, and saving, selected years, 1965 to 1987 149A.8 Growth of export volume, 1965 to 1988 150A.9 Change in export prices and terms of trade, 1965 to 1988 151A. 10 Growth of long-term debt of low- and middle-income economies, 1970 to 1988 152A.11 Investment, saving, and financing requirement, 1965 to 1987 153A.12 Composition of debt outstanding, 1970 to 1987 154

vul

C'

Financial terms

Banks. Financial institutions that accept funds,principally in the form of deposits repayable ondemand or at short notice (such as demand, time,and savings deposits). Under the general rubric"banks" come: commercial banks, which engageonly in deposit taking and short- and medium-term lending; investment banks, which handle se-curities trading and underwriting; housing banks,which provide housing finance; and so on. Insome countries there are universal banks, whichcombine commercial banking with investmentbanking and sometimes with insurance services.

Capital market. The market in which long-termfinancial instruments, such as equities and bonds,are raised and traded.

Commercial bills. Short-term debt instrumentsthat are used mainly to finance trade. Examples arepromissory notes, by which debtors commit them-selves to pay to creditors or to their order a statedsum at a specified date, and bills of exchange,which are drawn up by creditors and accepted bydebtors. Commercial bills that are also accepted bybanks are known as bank acceptances. Promissorynotes issued by large corporations to meet theirgeneral financial needs are known as commercialpaper.

Contractual savings institutions. Occupationalpension funds, national provident funds, life in-

nitions and data notes

surance companies, and similar institutions thatcollect long-term savings on a contractual basis.

Curb market. An unofficial money and capitalmarket.

Development finance institutions (DFIs). Finan-cial intermediaries that emphasize the provision ofcapital (loans and equity) for development. DFIsmay specialize in particular sectorsfor example,industry, agriculture, or housing. Although mostprovide only medium- and long-term capital,some, particularly those that specialize in agricul-ture, also provide short-term finance.

Discount. A reduction from the face value of afinancial contract.

Equity finance. The provision of finance in aform that entitles its owner to share in the profitsand net worth of the enterprise.

Eurocurrency market. A market in which assetsand liabilities denominated in a particular currencyare held outside the country of that currency.

Financial savings. The portion of total wealthheld in the form of financial assets.

Foreign portfolio investment. Investment by for-eign residents in domestic capital markets, withoutthe investors' provision of technology and man-agement services that usually occurs with foreigndirect investment.

Forward contract. An agreement to purchase orsell at a future date a fixed amount of commoditiesor securities at a preset price.

ix

Fractional reserve banking. The practice bywhich commercial banks maintain a reserve ofhighly liquid assets (usually deposits in a centralbank) equal to only a fraction of their deposit liabil-ities.

Hedging. The acquisition of a financial contractdesigned to protect the purchaser against a futurechange in the price of a commodity or security inwhich the purchaser has an interest.

Indexation. A mechanism for periodically ad-justing the nominal value of contracts in line withmovements in a specified price index.

Leverage. The ratio of debt to equity or of debtto total capital employed.

Liquid liabilities. Money plus highly liquidmoney substitutes, such as savings deposits.

Market capitalization. The total value of out-standing securities at present market prices.

Money. Currency and other liquid assets. Nar-row definitions such as Ml refer to money used asa medium of exchange. Broader definitions such asM2 or M3 add to Ml money used as a store ofvalue.

Ml. Currency outside banks plus demand de-posits, excluding those held by government andbanking institutions.

Ml plus time and savings deposits (otherthan large certificates of deposit) at commercialbanks.

M2 plus deposits at nonbank thrift institu-tions.

Money market. A market in which short-termsecurities such as Treasury bills, certificates of de-posit, and commercial bills are traded.

Nonbank financial inter,nediaries. Financial insti-tutions, such as building societies and insurancecompanies, that hold less-liquid liabilities not nor-mally regarded as part of the money stock.

Nonperforming loan. A loan on which contrac-tual obligations (for example, interest or amortiza-tion payments) are not being met.

Reserve money. Currency in circulation plus de-posits (of banks and other residents but not thegovernment) with the monetary authorities.

Rotating savings and credit association (ROSCA).An informal group of six to forty participants whoregularly (for example, monthly) make a contribu-tion into a fund that is given in rotation to eachgroup member.

Seigniorage. The net revenue derived frommoney issue.

Swaps. The exchange of future streams of pay-ment between two or more parties.

x

Term finance. Equity or medium- and long-termloan finance.

Country groupings

For operational and analytical purposes, the WorldBank classifies economies according to their percapita GNP. Other international agencies maintaindifferent classifications of developing countries(see the table on pages 250-51 for a comparativelisting).

Country classifications have been revised sincethe 1988 edition of the World Development Reportand its statistical annex, the World DevelopmentIndicators. The principal changes are: (a) the "de-veloping economies" group has been dropped,but references to the specific income groups low-and middle-income economies have been retained, (b)all economies with a GNP per capita of $6,000 ormore are classified as high-income economies, and (c)the subgroups "oil exporters" and "exporters ofmanufactures" under "developing economies"have been dropped. In addition, "high-income oilexporters" is no longer a separate group; "indus-trial economies" has been renamed OECD mem-bers, which is a subgroup of the new category high-income economies; and a new aggregate, totalreporting economies, and its subcategory oil exportershave been added. As in previous editions, this Re-port uses the latest GNP per capita estimates toclassify countries. The country composition ofeach income group may therefore change from oneedition to the next. Once the classification is fixedfor any edition, all the historical data presented arebased on the same country grouping. The countrygroups used in this Report are defined below.

Low-income economies are those with a GNP percapita of $480 or less in 1987.

Middle-income economies are those with a GNPper capita of more than $480 but less than $6,000 in1987. A further division, at GNP per capita of$1,940 in 1987, is made between lower- and upper-middle-income economies.

High-income economies are those with a GNPper capita of $6,000 or more in 1987.

The Report has always used a specific level ofGNP per capita as the dividing line between low-and middle-income economies. In previous edi-tions the line between middle- and high-incomegroups was ambiguous. Industrial market econo-mies and high-income oil exporters were shownseparately, but some economies remained in themiddle-income group although their GNP per cap-

ita was higher than that of some countries classi-fied as high income. The cutoff point of $6,000 forhigh-income economies in this edition removesthat anomaly.

Low- and middle-income economies are some-times referred to as "developing economies." Theuse of the term is convenient; it is not intended toimply that all economies in the group are experi-encing similar development or that other econo-mies have reached a preferred or final stage of de-velopment. Classification by income does notnecessarily reflect development status. (In this edi-tion of the World Development Indicators, high-income economies classified by the United Nationsor otherwise regarded by their authorities as devel-oping are identified by the symbol t) The use ofthe term "countries" to refer to economies impliesno judgment by the World Bank about the legal orother status of any territory.

Nonreporting nonmembers are Albania, Angola,Bulgaria, Cuba, Czechoslovakia, German Demo-cratic Republic, Democratic People's Republic ofKorea, Mongolia, Namibia, and Union of SovietSocialist Republics.

For analytical purposes, other overlapping clas-sifications based predominantly on exports or ex-ternal debt are used in addition to geographiccountry groupings. The economies in these groupswith populations of more than 1 million are listedbelow.

Analytical groupings

Oil exporters are countries for which exports ofpetroleum and gas, including reexports, accountfor at least 30 percent of merchandise exports.They are Algeria, Cameroon, People's Republic ofthe Congo, Ecuador, Arab Republic of Egypt, Ga-bon, Indonesia, Islamic Republic of Iran, Iraq, Ku-wait, Mexico, Nigeria, Norway, Oman, Saudi Ara-bia, Syrian Arab Republic, Trinidad and Tobago,United Arab Emirates, and Venezuela.

Seventeen highly indebted countries are thosedeemed to have encountered severe debt servicingdifficulties: Argentina, Bolivia, Brazil, Chile, Co-lombia, Costa Rica, Côte d'Ivoire, Ecuador, Ja-maica, Mexico, Morocco, Nigeria, Peru, Philip-pines, Uruguay, Venezuela, and Yugoslavia.

OECD members, a subgroup of high-incomeeconomies, comprises the members of the Organi-sation for Economic Co-operation and Develop-ment except for Greece, Portugal, and Turkey,which are included among the middle-incomeeconomies.

Geographic regions (low- and middle-incomeeconomies)

Sub-Saharan Africa comprises all countriessouth of the Sahara except South Africa.

Europe, Middle East, and North Africa compriseseight European countriesCyprus, Greece, Hun-gary, Malta, Poland, Portugal, Romania, andYugoslaviaall the economies of North Africa andthe Middle East, and Afghanistan.

East Asia comprises all the low- and middle-income economies of East and Southeast Asia andthe Pacific east of and including China and Thai-land.

South Asia comprises Bangladesh, Bhutan,Burma, India, Nepal, Pakistan, and Sri Lanka.

Latin America and the Caribbean comprises allAmerican and Caribbean countries south of theUnited States.

Acronyms and initials

BDC Botswana Development CorporationBFN Banco de Fomento NacionalBKK Badan Kredit KecamatanBNI Bank Negara IndonesiaCD Certificate of depositCOOPEC Cooperative d'Epargne et de CreditCPI Consumer price indexDFI Development finance institutionDTC Deposit-taking cooperativeEC The European Community (Belgium, Den-mark, Federal Republic of Germany, France,Greece, Ireland, Italy, Luxembourg, Netherlands,Portugal, Spain, and United Kingdom)EMBRAER Empresa Brasileira de AeronáuticaFOPINAR Fondo de Fomento para la PequenaIndustria y la ArtesanIaFSLIC Federal Savings and Loan Insurance Cor-porationGATT General Agreement on Tariffs and TradeGD? Gross domestic productGNP Gross national productGRT Gross receipts taxIBRD International Bank for Reconstruction andDevelopment (The World Bank)ICOR Incremental capital-output ratioIDA International Development AssociationIFC International Finance CorporationIFS International Financial Statistics, publishedmonthly by the IMFIMF International Monetary FundMFA Multifibre Arrangement

xi

NTB Nontariff barrierOECD Organisation for Economic Co-operationand Development (Australia, Austria, Belgium,Canada, Denmark, Finland, France, Federal Re-public of Germany, Greece, Iceland, Ireland, Italy,Japan, Luxembourg, Netherlands, New Zealand,Norway, Portugal, Spain, Sweden, Switzerland,Turkey, United Kingdom, and United States)PSBR Public sector borrowing requirementQR Quantitative restrictionROSCA Rotating savings and credit associationS&L Savings and loan associationSEC Securities and Exchange CommissionSOE State-owned enterpriseUMOA Union monétaire ouest africaine (WestAfrican Monetary Union)VISA Valores Industriales S.A.

Data notes

Billion is 1,000 million.Trillion is 1,000 billion.Dollars are current U.S. dollars unless other-

wise specified.

xii

Growth rates are based on constant price dataand, unless otherwise noted, have been computedwith the use of the least-squares method. See thetechnical notes of the World Development Indica-tors for details of this method.

The symbol . . in tables means not availableThe symbol - in tables means not applicable.The number 0 or 0.0 in tables means zero or less

than half the unit shown and not known moreprecisely.

All tables and figures are based on World Bankdata unless otherwise specified. The cutoff date forall data in the World Development Indicators isApril 30, 1989.

Data from secondary sources are not alwaysavailable after 1987. Historical data shown in thisReport may differ from those in previous editionsbecause of continuous updating as better data be-come available and because of new group aggrega-tion techniques that use broader country coveragethan in previous editions.

Economic and demographic terms are defined inthe technical notes to the World Development In-dicators.

The experiences of the 1980s have led many devel-oping countries to reconsider their approach to de-velopment. Although countries differ in the scaleof government intervention and in the extent towhich they have already stabilized and restruc-tured their economies, most have decided to relymore upon the private sector and market signals todirect the allocation of resources. To obtain all thebenefits of greater reliance on voluntary, market-based decisionmaking, they need efficient financialsystems.

A financial system provides services that are es-sential in a modern economy. The use of a stable,widely accepted medium of exchange reduces thecosts of transactions. It facilitates trade and, there-fore, specialization in production. Financial assetswith attractive yield, liquidity, and risk characteris-tics encourage saving in financial form. By evaluat-ing alternative investments and monitoring the ac-tivities of borrowers, financial intermediariesincrease the efficiency of resource use. Access to avariety of financial instruments enables economicagents to pool, price, and exchange risk. Trade, theefficient use of resources, saving, and risk takingare the cornerstones of a growing economy.

In the past, governments' efforts to promote eco-nomic development by controlling interest rates,directing credit to priority sectors, and securinginexpensive funding for their own activities haveundermined financial development. In recent

7

Financial systems and development:an ovewiew

years financial systems came under further stresswhen, as a result of the economic shocks of the1980s, many borrowers were unable to servicetheir loans. In more than twenty-five developingcountries, governments have been forced to assisttroubled intermediaries. The restructuring of insol-vent intermediaries provides governments with anopportunity to rethink and reshape their financialsystems.

Conditions that support the development of amore robust and balanced financial structure willimprove the ability of domestic financial systemsto contribute to growth. By restoring macroeco-nomic stability, building better legal, accounting,and regulatory systems, specifying rules for fullerdisclosure of information, and levying taxes thatdo not fall excessively on finance, governmentscan lay the foundations for smoothly functioningfinancial systems. This Report reviews the lessonsof experience in both high-income and developingcountries and tries to identify the measures thatwill enable domestic financial systems to providethe services needed in the 1990s.

The economic background

In 1988 conditions were generally favorable foreconomic growth in the developing countries.High-income countries enjoyed steady growthwith low inflation for the sixth consecutive year

1

and grew even faster in 1988 than in 1987. Interestand exchange rates were less volatile than duringearlier phases of the recovery from the worldwiderecession of 1982, and prices of the principal com-modities exported by developing countries rose byan average of 20 percent.

Some developing countries have taken advan-tage of the favorable world environment. Mostcountries in Asia did well; in several the gross na-tional product (GNP) grew at an estimated annualrate of 10 percent. Some countries, however, con-tinued to suffer from misdirected domestic poli-cies, excessive indebtedness, and the economicshocks of the 1980s. The growth rates of many Af-rican nations remained near zero. The heavily in-debted economies also continued to stagnate. Thegovernments of creditor countries agreed at theToronto summit to grant debt relief to the poorestand most heavily indebted countries, such as thecountries of Sub-Saharan Africa, and early in 1989took the first official steps to sanction debt relief forthe middle-income countries. But despite a rise inthe disbursement of funds to the highly indebtedcountries in 1988, net transfers to these countriescontinued to be negative.

Future growth in the developing countries willdepend in part on the policies of high-incomecountries. By ensuring the success of the UruguayRound of trade negotiations, the high-incomecountries can create a favorable environment forthe exports of developing countries. Tighter fiscalbut easier monetary policy in high-income coun-tries would bring international interest ratesdown, which would ease the burden of debt. Thiswould benefit developing and high-income coun-tries alike. But far more important will be the poli-cies pursued by the developing countries them-selves. They can improve their growth prospectsby continuing to seek fiscal balance and trade re-forms. The decline in foreign capital flows hasplaced a premium on policies that encourage do-mestic saving and investment and direct the flowof resources to profitable activitiesin otherwords, on policies that will improve the perfor-mance of domestic financial systems.

Origins of financial distress

When the developing countries set out to modern-ize their economies in the 1950s and 1960s, theirfinancial systems comprised mainly foreign-owned commercial banks. These provided short-term commercial and trade credit. Governmentsdecided to remodel their financial systems to en-sure that resources were allocated in accordance2

with their development strategies. Toward thisend, they created new financial institutions to pro-vide funding at low interest rates to the sectorsthat were to be at the forefront of industrial devel-opment, or they directed existing institutions to doso. The governments themselves borrowed heavi-ly, both from the domestic financial system andfrom abroad, to finance budget deficits and theneeds of state-owned enterprises. In many coun-tries banks were also directed to open ruralbranches in order to mobilize deposits and providecredit to widely dispersed smallholders.

During the 1960s this development strategyseemed to be working: many developing countriesgrew rapidly. But economic performance duringthe 1970s was more mixed. Despite favorableterms of trade and an ample supply of cheap for-eign financing, growth in some countries began toslow. Except in Asia, only a few developing coun-tries have grown rapidly in the 1980s.

The interventionist approach was much less suc-cessful in promoting financial development. Undergovernment pressure, banks did lend to state en-terprises and priority sectors at below-market in-terest rates, but spreads were often too small tocover the banks' costs. Many of the directed loanswere not repaid. Interest rate controls discouragedsavers from holding domestic financial assets anddiscouraged institutions from lending longer termor to riskier borrowers. In some countries, publicborrowing from commercial banks displaced lend-ing to the private sector; in others, public borrow-ing financed by money creation led to rapid infla-tion. Many countries developed a market forshort-term debt, but only a few have more than arudimentary system for long-term finance. In sum,the financial systems of all but a few developingcountries remain small and undeveloped.

In recent years the inability or unwillingness ofborrowers to repay their loans has become a seri-ous problem. Its roots lie in the shocks of the early1980s and in the industrial and financial policiespursued over the past thirty years. Many countriesdepended on commodity exports and foreign bor-rowing to pay for the imported inputs essential totheir industrialization programs. For the highly in-debted countries in particular, foreign borrowingbecame expensive as interest rates rose in the late1970s; it became virtually impossible as foreigncommercial banks ceased voluntary lending after1982. Deteriorating terms of trade and interna-tional recession in the early 1980s further reducedcountries' ability to pay for imports. Many coun-tries were forced to reduce their trade deficits. Topromote exports, they devalued their currencies

and lowered their tariffs and other trade barriers.Firms in developing countries therefore had to faceabrupt changes in relative prices, often alongsiderecession at home. Many became unprofitable andthus were unable to service their loans.

Instead of foreclosing on bad debts, many bank-ers chose to accrue unpaid interest and roll overunpaid loans. In some cases this was because theborrowers were linked to the banks through own-ership, in others because taking provisions for loanlosses would have made the banks insolvent. Col-lateral was often inadequate, and foreclosure pro-cedures were slow and biased in favor of debtors.So in many countries it was not thought feasible tostart bankruptcy proceedings. The practice of roll-ing over unpaid loans and making new loans tocover unpaid interest has undermined the adjust-ment process: instead of financing new venturesmade profitable by changed relative prices, muchnew lending has gone to prop up firms that are nolonger viable.

Financial institutions in many developing coun-tries have suffered large losses: many are insol-vent, and some have actually failed. Bank insol-vency is nothing new, but the scale of theproblemthe number of insolvent institutions, thesize of their losses, and the number of countriesaffectedis without precedent. Although morethan twenty-five developing countries took actionduring the 1980s to restructure financial institu-tions, many of them dealt with only the largest ormost seriously affected ones; others remain se-verely impaired. Restructuring banks is politicallydifficult, particularly when the banks are public orthe principal defaulters are public enterprises, butexperience shows that delay is costly and thatlosses mount with time.

Reform needs to go beyond recapitalizing insol-vent banks. It must address the underlying causesof bank insolvency as well. Governments canstrive to provide macroeconomic stability, whichgenerally means reducing their spending. Theycan also undertake the structural adjustments thatwill lead to a more productive use of resources.Restructuring or closing insolvent firms must bepart of this process; otherwise the recapitalized in-termediaries that continue to lend to them willonce again become insolvent.

Prerequisites for financial development

Countries with stable economies and fairly well-developed and competitive financial marketswould benefit from giving market forces more in-fluence over interest rates. Where these conditions

are not satisfied, governments may choose to con-trol interest rates, but unless that control is flexibleenough to take account of inflation and marketpressures, it will impede financial development.Proper alignment of interest rates is particularlyimportant for economies that have open capitalmarkets.

In the past, governments have allocated creditextensively. In a world of rapidly changing relativeprices, complex economic structures, and increas-ingly sophisticated financial markets, the risk ofmismanaging such controls has increased. Manycountries could allocate resources better by reduc-ing the number of directed credit programs, theproportion of total credit affected, and the degreeof interest rate subsidization. Governments thatcontinue to direct credit should specify prioritiesnarrowly. An emphasis on credit availability ispreferable to interest rate subsidies, which under-mine the financial process.

Liberating financial institutions from interest rateor credit controls cannot, by itself, ensure that fi-nancial systems will develop as intended. The le-gal and accounting systems of most developingcountries cannot adequately support modern fi-nancial processes. Legal systems are often out-dated, and laws concerning collateral and foreclo-sure are poorly enforced. Because collecting debtscan be difficult, and because borrowers are hard tomonitor and control, lenders have been unwillingto enter into certain types of financial contract. Ifgovernments overcome such reluctance by direct-ing banks to make loans that the banks considertoo risky, losses can result. Governments can in-crease the supply of long-term loans and othertypes of financing by reducing the risks tolendersfor instance, by requiring fuller disclo-sure of financial information and defining and en-forcing the lenders' rights. To ensure the stabilityof the financial system and discourage lendersfrom fraud, it is equally important for govern-ments to supervise financial markets and institu-tions. In the past, supervisors have spent toomuch time checking banks' compliance with direc-tives on credit allocation and too little time inspect-ing the quality of their loans and the adequacy oftheir capital.

Institutions and markets

Commercial banks are likely to remain the domi-nant institutions for some time. Banks can be mademore efficient by improving their managementsystems and increasing the competition they face.Better management requires new lending policies,

3

better loan recovery procedures, more sophisti-cated information systems, and better-trainedstaff. The entry of new banks, domestic or foreign,can stimulate competition.

Countries also need to develop other financialinstitutions, whose services compete with andcomplement those of commercial banks. Nonbankfinancial intermediaries, such as development fi-nance institutions, insurance companies, and pen-sion funds, are potentially important sources oflong-term finance. Most of the existing develop-ment banks are insolvent, however. Where theyare to be restructured, rather than closed ormerged with commercial banks, thought must begiven to their future role and viability. Any diversi-fication should build on the experience of theirstaffs and on their existing client relationships. Asmore of the population becomes able to and de-sires to make provision for retirement, contractualsavings institutions will grow in size. Permittingpension funds and insurance companies to investin financial instruments other than low-interestgovernment bonds can greatly increase the supplyof long-term finance to the private sector.

Many developing countries have benefited fromthe creation of money and capital markets. Moneymarkets can provide competition for banks, a flexi-ble means for managing liquidity, a benchmark formarket-based interest rates, and an instrument ofmonetary policy. Capital markets can be a sourceof long-term financeboth debt and equityandcan help to foster sounder corporate capitalstructures.

Most developing countries have a long-established informal financial sector that providesservices to the noncorporate sectorhouseholds,small farmers, and small businesses. Althoughfamily and friends are usually the most importantsource of credit, pawnbrokers provide a substan-tial amount of credit to those with marketable col-lateral, and moneylenders to those without. Mer-chants provide financing to their customers, andpurchasing agents advance funds to their suppli-ers. Rotating savings and credit associations areubiquitous in the developing world.

Financial institutions have often been weakenedby being forced to channel credit to small-scaleborrowers. Because such borrowers do not main-tain financial accounts, formal lenders find it diffi-cult to predict who is likely to repay. Moreover, ifthe borrower is in a group favored by government,formal intermediaries may find it difficult to col-lect. The informal sector, in contrast, has been ableto serve such borrowers. Informal lending has se-

4

vere drawbacks, however. The scale of lending issmall, the range of services is limited, markets arefragmented, and interest rates are sometimes usu-rious. Nevertheless, these institutions help clientsthat formal institutions often find too costly orrisky to serve. Some countries have recognizedthis and have established programs to link infor-mal markets more closely with formal markets.The most successful formal programs for the non-corporate sector utilize rather than suppress indig-enous systems, take deposits as well as lend, andlevy charges that cover costs.

As the developing countries move toward moresophisticated financial systems, they can draw onthe experience of the high-income countries in thedesign of instruments and institutions. Some ofthe lessons are cautionary. One lesson is that com-petitive financial markets, although efficient at mo-bilizing and allocating funds and managing risk,can still make mistakeswitness the excessivelending to developing countries that took place inthe 1970s and the current savings and loan crisis inthe United States. Another is that market-basedfinancial systems can be unstable and susceptibleto fraud. This underlines the importance of ade-quate regulation and supervision. Because financeevolves rapidly, regulators must continually strivefor the right balance between stimulating competi-tion and growth and limiting fraud and instability.

The path to reform

Many developing countries have taken steps to-ward financial liberalization during the past de-cade. In perhaps a dozen countries, interest rateshave been fully liberalized; in many more, interestrates are managed more flexibly than before. Manycountries have curtailed their directed credit pro-grams, although few have eliminated them en-tirely. Competition among financial institutionshas been promoted by opening the domestic mar-ket to foreign banks and by authorizing chartersfor new banks and nonbank financial intermedi-aries. Several centrally planned economies aim tostimulate competition by extensively restructuringtheir banking systems.

In a few countries financial liberalization hasbeen quite comprehensive. Argentina, Chile, andUruguay, for example, carried out extensive re-forms in the mid-1970s, including the eliminationof directed credit programs, interest rate controls,and exchange controls. Several Asian countrieshave also moved toward deregulation, but the re-forms were introduced more gradually and were

less comprehensive. Financial liberalization hassometimes proved difficult. In the Southern ConecountriesArgentina, Chile, and Uruguayliberalization ended in disarray: the government ofArgentina had to reimpose controls, and all threegovernments had to deal with widespread bankfailures. Turkey's government had to restore inter-est rate controls when real rates rose too high. Butin Asia, where macroeconomic conditions weremore stable and reforms were implemented moregradually, there has been no need to reintroducecontrols.

Experience suggests that financial liberalizationneeds to be undertaken alongside macroeconomicreform. Countries that attempted financial liberali-zation before undertaking other reforms suffereddestabilizing capital flows, high interest rates, andcorporate distress. Although certain measuresshould be taken at an early stage, such as the align-ment of interest rates with market forces, overallliberalization cannot succeed unless it is accompa-nied by the restructuring of insolvent banks andfirms and by adequate regulation and supervision.Domestic financial markets need to be competitiveto ensure that intermediaries are efficiently run.And to avoid the destabilizing capital flows thatproved so difficult to manage in several countriesattempting deregulation, care must be taken inopening the capital account.

The change in many countries' approach to de-velopment implies important changes in their fi-nancial sectors. Countries that wish to rely moreupon private decisionmaking need financial sys-tems that operate on a more consensual basis. Forthat, confidence is neededconfidence that thevalue of financial contracts will not be eroded byinflation and that contracts will be honored. Get-ting the pricesinterest ratesright is importantfor financial development, but this must be com-plemented by other policies as well. Countries alsoneed to create appropriate financial institutions,develop better systems of prudential regulationand supervision, improve the flow of financial in-formation, develop human skills for managingcomplex financial operations, and promote goodfinancial habits. None of these changes will be eas-ily or quickly accomplished.

Outline of the Report

Chapter 1 describes the global macroeconomic en-vironment that has confronted developing coun-

tries in recent years and discusses two scenariosfor prospects to the end of the century. Even underthe more optimistic of these, the developing coun-tries face serious economic challenges.

Chapter 2 introduces the main body of the Re-port and examines the role of finance in develop-ment. It argues that finance matters in more waysthan might be immediately apparent. Efficient fi-nancial systems help to allocate resources to theirbest uses and are indispensable in complex, mod-ern economies. In many developing countries, assome of their governments have begun to realize,the financial sector is in urgent need of reform.

Reform will not be easy, but the difficulties facedby developing countries as they seek to improvetheir financial systems are not new. Chapter 3charts the history of financial institutions in theindustrial countries. It shows an often unsatisfac-tory mixture: innovation in response to the needsof growing economies, but many disruptive epi-sodes of financial instability. Failures and fraud intheir financial systems have led governments tointervene extensively.

Chapter 4 shows that for several decades afterWorld War II, regulation of the financial systems indeveloping countries was designed to control theeconomy rather than foster the safety and sound-ness of banks. More than in the high-income coun-tries, governments used the financial system topursue their development objectives. This lefttheir financial institutions weak, and as a resultmany were unable to withstand the worldwideeconomic shocks of the 1970s and early 1980s.Chapter 5 describes the difficulties of financial in-stitutions in many countries and the steps taken bysome governments to address the problems oftheir financial sectors.

This experience has led the developing countriesto reassess their financial policies. A search is un-der way for policies that will strengthen the finan-cial sector so that it can make its full contributionto the efficient use of resources, while keeping itstendency toward instability in check. Chapter 6examines the legal and institutional changes thatshould be part of this reappraisal. Chapters 7 and 8report in more detail on the current provision offinancial services to the corporate and noncor-porate sectors and explore ways in which theseservices might be improved. Chapter 9 discussesthe lessons that can be learned from the develop-ing countries that have already begun to liberalizetheir financial sectors.

5

Adjustment and growth in the 1980sand 1990s

Economic performance in the 1980s has variedwidely among countries and continents. After asharp recession at the beginning of the decade, theindustrial countries are well into their seventh yearof uninterrupted growth, although at rates lowerthan those of the 1950s and 1960s. In parts of Asia,where much of the world's poverty is concen-trated, economic growth in the 1980s has beenfaster than in earlier decades. But in Africa andLatin America hundreds of millions of people haveseen economic decline and regression rather thangrowth and development (see Figure 1.1). In somecountries in Latin America real per capita GNP isless than it was a decade ago (see Figure 1.2); insome African countries it is less than it was twentyyears ago.

Why have some countries fared so much betterthan others during the 1980s? Economies differgreatly in their structures, in their domestic devel-opment strategies and policies, and in the extent towhich they have been affected by external shocks.Higher real interest rates, reduced internationalcapital flows, and lower commodity prices havemade adjustment both necessary and difficult, par-ticularly for the highly indebted countries, Butsome governments have been more successfulthan others in pursuing short-term adjustmentand longer-term structural reform. In addition,markets and agents have varied in the speed withwhich they responded to new policies and tochanged incentives.

6

The prospects for growth in the developingcountries in the coming decade depend primarilyon their own actions, but also on the environmentcreated by the actions of the industrial countries.The industrial countries can promote growth in thedeveloping economies in three ways: by adoptingfiscal and monetary policies to maintain their owngrowth while reducing real interest rates, by en-suring the success of the Uruguay Round of tradenegotiations and thereby keeping the internationaltrading system open and the volume of trade ex-panding, and by ensuring that the internationalcommunity provides the external resources thatthe developing countries need for growth andadjustment.

The international economic environment

The world economy in the 1980s was dominatedfirst by sharp recession, then by steady and pro-longed growth in the industrial countries, highreal interest rates, declining real commodityprices, massive movements in exchange rates, andthe collapse of voluntary private lending to manydeveloping countries. The recovery of the indus-trial countries from the recession of 1982 has beenstrong and so far without interruptionthe secondlongest recovery since World War II. But the mix offiscal and monetary policies and the resulting pat-tern of trade and growth have changed over thepast eight years.

Figure 1.1 Growth of real GNP in developing countries by region, 1965 to 1988(average annual percentage change)

Sub-Saharan East Asia South Asia Europe, Middle Latin America andAfrica East, and North the Caribbean

Africa10

6

4

2

0

LI 1965-73 U 1973-82 U 1982-88

Figure 1.2 Real GNP per capita in developing countries by region, 1965 to 1988(period average in 1980 dollars)

Sub-Saharan East Asia South Asia Europe, Middle Latin America andAfrica East, and North the Caribbean

Africa2,000

1,600

1,200

800

400

0

LI 1965-73 U 1974-82 U 1983-88

Note: GNP is measured at 1980 prices and exchange rates.

/

7

The early years of the recovery were led by briskgrowth in the United States, where tax cuts andincreased spending on defense provided the impe-tus. The expansionary U.S. fiscal policy, combinedwith anti-inflationary monetary policy worldwide,led to high real interest rates (especially in theUnited States), an appreciating dollar, and a boomin imports and consumer spending in the UnitedStates. As a result, the U.S. current account deficitdeteriorated by $100 billion between 1982 and1984. This, in turn, led to expectations of a declinein the dollar, which were fulfilled between 1985and 1987.

In the Federal Republic of Germany and Japan,expansionary policies in 1987 and 1988 were con-sistent with low inflation because of the decline inoil prices and the appreciations of the yen and thedeutsche mark. The transition to domestic-ledgrowth was particularly successful in Japan, wherethe growth of consumption, imports, and espe-cially investment (a rise of 11 percent in 1988) sup-ported continued growth in the world economy.

The worldwide stock market crash of October1987 clouded the outlook for economic growth atthe beginning of 1988. But vigorous and concertedresponses to the crash by monetary authorities inthe leading financial centers, some fiscal adjust-ment in the United States, and cheaper oil all com-bined to permit steady growth with low inflation inthe industrial countries in 1988. Indeed, growth inthe high-income countries of the Organisation forEconomic Co-operation and Development (OECD)was markedly higher in 1988 than in 1987 (4.2 per-cent compared with 3.4 percent). Only at the endof the yearas fears grew that pressures on capac-ity would increase inflation and that the new U.S.administration would not attack the budgetdeficitdid exchange and interest rates show someof the volatility that had characterized the earlierstages of recovery.

Interest rates

Real interest rates in the 1980s have been higherthan at any time since the Great Depression. Theyclimbed during the early part of the decade, asmonetary restraint brought down inflation whileraising nominal interest rates. One explanation forthe persistence of high interest rates is that nomi-nal rates are affected by the fear that inflation willreturn. This may help to account for high long-term nominal interest rates, but it cannot explainthe persistence of high short-term rates.

Another explanation for high interest rates is the

8

decline in the world's saving rate, which appearsto have fallen (the data are imprecise) by 2 percent-age points in the 1980s, to 11 percent in 1987. Partof this decline is a result of the increase in the U.S.federal budget deficit, which in 1987 amounted toabout 8 percent of world saving of just under $2trillion. Lower saving by other governments anddeclining private saving rates in many countriesalso played a role.

World growth can now be maintained with a pol-icy mix in which monetary policy loosens as fiscalpolicy tightens, with the extent of monetary ex-pansion determined by concerns about future in-flation. This combination, including a significantreduction in the U.S. budget deficit and other in-creases in world saving, would help to reduce realinterest rates. That, in turn, would contribute tohigher investment and thus to growth led from thesupply side.

Lower interest rates would assist growth in de-veloping countries by reducing the cost of financ-ing new investments and easing the burden of theexisting debt. The low interest rates of the 1950sand 1960s are unlikely to return, however; real in-terest rates on safe government bonds may be ex-pected to remain well above the postwar averageof 1 percent.

High interest rates have reduced the extent towhich developing countries can rely on foreignborrowing to finance development. Higher real in-terest rates lower the ratio of debt stock to exportsthat a country can sustain and thereby make nettransfers of resources to lenders necessary sooner.Ratios of debt stock to exports that may have beensustainable at the interest rates of the 1970s are notsustainable at the interest rates of the 1980s.

More than in the past, developing countries willhave to rely on their own saving to finance invest-ment. This underlines the need for greater effi-ciency in their financial systemsboth to encour-age saving and to allocate investment moreeffectively.

World trade

Growth in the developing world has been affectednot only by the growth of imports by the industrialcountries but also by the changing source andcomposition of import demand. Figure 1.3 showsthe relationship between world economic growthand world trade. The recession of 1982 hurt worldtrade overall, but developing country trade fellproportionately more. In general, the volume ofworld trade fluctuates more than world growth,

and developing country trade is even more vola-tile. Resilient economies can absorb these shocksand rebound rapidly. For example, open econo-mies that depend on manufactured exports, suchas some of the newly industrialized economies ofEast Asia, were particularly hard hit by the slumpin world trade in 1982. But these outward-orientedcountries experienced faster export growth duringthe 1980s, and their economies have grown muchmore quickly than those of countries that pursuedmore inward-oriented policies.

Export growth not only contributes directly toeconomic growth but, more important, also per-mits more imports and a rapid modernization ofproduction. The result is efficient domestic indus-try that meets the market test of international com-petition. High export growth among East Asiancountries and low export growth in Latin Americaand Africa have significantly changed the regionaldistribution of developing country exports duringthe 1980s (see Figure 1.4).

The volume of world trade increased by morethan 9 percent in 1988the fastest growth in the1980s. Trade patterns have been strongly affectedby the expansion of domestic demand in Japan andthe delayed effects of exchange rate movements.Import volume in Japan was up by 17 percent in1988, compared with an 8 percent increase in theEuropean countries; the yen moved significantlymore against the dollar than did the European cur-rencies. The middle-income countries of East Asiasharply increased their exports to Japan, and EastAsian intraregional trade increased by 30 percent.

Oil and commodity prices

Massive swings in the price of oil and a prolongeddecline in the real prices of other commoditieshave posed short- and long-term adjustment prob-lems for producers and consumers alike in the1980s. The real price of oil (deflated by the unitvalue of manufactures) more than doubled from1978 to 1981, peaking at six times its 1973 level. Itthen drifted downward for several years, collaps-ing to its pre-1973 level late in 1988, when the mar-ket price dipped below $11, before quickly re-bounding to $20 in the first part of 1989. The realprices of most other commodities continued to de-cline during the 1980s, except for minor price run-ups such as the revival of metal prices in 1988 (seeFigure 1.5).

The large swings in the relative prices of com-modities (especially oil) have made it harder forgovernments (especially in commodity-producing

Figure 1.3 Growth of output and trade,1980 to 1988(annual percentage change)

12

10

8 World trade

4 -'7W

Developing countries' trade

0

246

World output

1980 1981 1982 1983 1984 1985 1986 19871988

Note: Trade growth is defined as the average of the growth ratesfor export and import volumes.Source: IMF and World Bank data.

countries) to manage demand and exchange rates.Oil price increases and the surge in the value of oilexports put upward pressure on the producers'exchange rates and thereby harmed non-oil ex-ports and encouraged imports. This difficultyknown as the Dutch diseasehas been faced byhigh-income countries (such as the Netherlandsand the United Kingdom) and low-income coun-tries (such as Nigeria and Egypt) alike. When thecommodity boom passed, trade deficits followed.Moreover, in some countries oil taxes supportedpublic spending programs that have since beendifficult to curb. As a result of the decline in theprice of oil since 1982, gross domestic product(GDP) in the oil-exporting countries grew by only1.6 percent annually between 1982 and 1988, com-pared with 5.0 percent between 1973 and 1982.

Countries that depend on commodity exportsshould save morerun larger current account sur-pluses or smaller deficitswhile export revenuesare temporarily high. It is difficult, however, todistinguish between temporary and permanentchanges in commodity prices. Was the upturn inmetal prices in 1988 part of a medium-term trend,

9

Figure 1.4 Growth of export volume in developing countries by region, 1965 to 1988(average annual percentage change)

12

10

4

Sub-Saharan East Asia South AsiaAfrica

7

/ -

[1 1965-73 U 1973-82 El 1982-88

Note: Exports are measured at 1980 prices and weighted by U.S. dollar value.

or was it a temporary blip? Moreover, despite theuncertainties, it may be politically difficult for poorproducers to take a conservative view of the likelycourse of commodity prices. Some exporters of oiland other commodities, such as Chile, Indonesia,Kuwait, and Morocco, have succeeded in spread-ing risk, both by diversifying production andthrough financial and fiscal management. Butmany others, to their detriment, have not.

Structural adjustment policies and challenges

"The setback to development in Africa, Latin Amer-ica, and Eastern Europe in the 1980s followed twodecades of rapid growth. Yet this growth was oftenfounded on development strategies that failed toemphasize economic efficiency and international

10

Europe, MiddleEast, and NorthAfrica

Latin America andthe Caribbean

competitiveness and that drew finance fromabroad by distorting the domestic financial system.External shocks precipitated the crisis of the 1980s.But internal structure determined how countrieswould respond. Faced with changed circum-stances, countries now have no choice but to ad-just. During the 1980s governments of countries atall income levels and, remarkably, of all ideologicalstripes have come to recognize the need for re-forms to increase economic efficiency andflexibility.

At the most abstract level, adjustment programsuse changes in fiscal, monetary, and sectoral poli-cies, in regulations, and in institutions to alter rela-tive prices and the level of spending and therebyredirect economic activity. The real exchange rateand the real interest rate are key relative prices.

6

0

2

They affect both economic activity and saving, aswell as exports and imports and the rate of invest-ment. Changes in taxes, subsidies, and quantita-tive controls move resources between sectors. En-suring that adjustment achieves a balanced changein spending and an appropriate sectoral realloca-tion is critical for growth and development. Thedomestic financial system plays an important role.It mobilizes domestic saving and directs it to themost profitable investments.

Structural adjustment is complicated and slow.It is especially difficult nowand all the morenecessarybecause many developing countriesare in dire financial straits. Countries need externalresources to offset the costs of adjustment. In the1980s both the International Monetary Fund (IMF)and the World Bank have helped finance economicprograms contributing to the adjustment process.Fifty-nine countries received long-term structuraladjustment loans from the World Bank between1980 and 1988. The programs consist of a series ofoperations, worked out with the borrower, that areconducted within a medium-term macroeconomicframework which is often supported by the IMF.

Many governments have made progress towardrestructuring their economies, especially with re-gard to trade reform and exchange rate policy. Butfurther reforms will be necessary. In some casesindustrial policies in support of earlier import-substitution strategies have maintained a protec-tionist stance, despite trade reform. In other casesinefficient financial systems continue to distort in-terest rates. In many countries the failure of fiscalreforms is undermining the adjustment achievedso far and preventing further progress. Unsustain-able fiscal deficits create economic uncertainty,contribute to high inflation, and subvert the do-mestic financial system.

In East Asia the newly industrialized economiesand several others have pursued sound macroeco-nomic policies and maintained the competitive-ness of their exports. They have generally adaptedwell to the shocks of the 1970s and early 1980s. Thepopulous economies of South Asia have alsoachieved good results. Their success has more todo with macroeconomic stability, prudent fiscaland external borrowing policies, and rural mod-ernization than with internationally competitivetrade policies. But economies are not prisoners oftheir geography. Chile has pursued one of themost wide-ranging programs of economic liberali-zation, despite setbacks in the early 1980s, andseems to be shedding the problems that besetmany of its neighbors.

Figure 1.5 Real commodity prices, 1970 to 1988

Index (1979-81 = 100)150

125

100

75

50

25

0

Nonfuel primary commodities'

AAI"Metals and minerals

Note: Real prices are annual average prices in dollars, deflated bythe annual change in the manufacturing Unit value (MUV) index,a measure of the price of industrial country exports to developingcountries.a. Based on a basket of thirty-three commodities.

Challenges for successful adjusters

Successful adjusters, especially those in East Asia,not only increased domestic saving and main-tained high investment during the 1980s (see Fig-ure 1.6) but also achieved export-led growth. Inthe future their growth will need to depend less onexternal demand; domestic consumers shouldreap some of the fruits of successful investment inmanufacturing. Domestic saving rates may there-fore return to their somewhat lower levels of the1970s.

Maintaining competitiveness requires supportfor the development of infrastructure and humancapital. In most countries such programs are gov-ernment funded. They call for long-term invest-ment strategies. Sound fiscal policy is a pre-requisite.

Moreover, as the successful adjusters becomemore integrated with the international capital mar-kets, and as they compete with the next generationof exporters of manufactured goods, the efficientallocation of domestic saving will become evenmore important. A domestic financial system

11

1970 1975 1980 1985 1988

Figure 1.6 Saving and investment rates in developing countries by region, 1965 to 1987(percentage of GNP)

30 20 10

Note: Saving and investment are measured at current prices.

0 0 10 20 30

based on market principles will contribute to thisend.

Adjustment in Sub-Saharan Africa

The gravest development problems are in Sub-Saharan Africa, Unfavorable external conditions(including a prolonged fall in the terms of trade ofprimary goods exporters) and inadequate domesticpolicies have caused economic, social, and envi-ronmental decline.

After reasonable growth in the 1960s and early1970s, the region's economic performance deterio-rated. Export growth was robust before the 1973 oilshock but stalled thereafter; it has recovered some-what but not to previous levels. Saving and invest-ment rates fell sharply in the early 1980s (Figure1.6) and are today less than two-thirds of the de-veloping country average. The collapse in saving is12

partly attributable to fiscal deficits, which ex-panded during the 1980s. Private saving did notincrease eitherbut it is extremely difficult to in-crease saving when income is falling. Most impor-tant, the combination of slow growth and rapidlyexpanding populations reduced per capita in-comes and left many people close to starvation.Average caloric intake is no higher than twentyyears ago.

Nevertheless, some adjustmentpainfully slowand not always sustainedis occurring. Manygovernments have started to reduce their role inthe economy and are focusing their spending onpriority areas. This means curbing spending on thecivil service, on subsidies, and on state-owned en-terprises. Some African governments (for exam-ple, in Ghana) have cut spending by creating aroster of the civil servants to ensure that only bonafide workersand no "ghost" or "phantom"

Gross domestic saving (S) Gross domestic investment (I)

0.1 1965-73

Sub-SaharanAfrica

2.0 E 1974-82

LI 1983-872.1

0.5East Asia 0.4

1.8

2.2South Asia 3.3

4.0

0.4Europe,Middle East, 1.5

1.4and North Africa

0.1Latin America andthe Caribbean

1.43.7

workersare on the payroll. An alternative is torelease workers with a lump-sum benefit. This in-creases the short-run cost of reducing the size ofthe government, and may encourage the betterworkers to leave, but in some countries it has pro-vided an impetus for the development of privateentrepreneurship. A sweeping removal of subsi-dies may not be possible, but targeting them to thetruly needy further reduces costs; many subsidiesbenefit urban dwellers who are relatively well-off.Ghana's program has kept adjustment on trackwhile helping the poor. Subsidies to unprofitablestate-owned enterprises are a big drain on bud-gets. Several African countries have experimentedwith privatization (Niger and Togo), liquidation(Benin, Ghana, and Mali), or rehabilitation undermanagement contracts (Senegal). Not all of theseefforts have been successful.

It is essential to correct overvalued exchangerates. This promotes a more sustainable pattern ofconsumption, encourages the export sector to di-versify, and may yield faster export growth. Côted'Ivoire and Mauritius show how quickly ex-porters can respond to improvement (and deterio-ration) in real export prices.

Adjustment also aims to reverse the bias againstagriculture. Taxes in many poor countries (not onlyin Africa) discourage domestic food productionand encourage food imports. Better incentives andagricultural modernization can raise the incomesof the rural poor, increase food security, and gener-ate foreign exchange. Policies of this sort includeprice decontrol (Mali, Niger, Nigeria, Somalia, andUganda) and the reform or abolition of agriculturalmarketing boards (Nigeria, Senegal, and Somalia).Higher farm output has also been achievedthrough broadly conceived extension services,which combine changes in farming methods withimprovements in credit delivery, marketing, andthe supply of inputs.

Regional integration has been a political aspira-tion since African independence. Cooperative ar-rangements have continued in Francophone Africabut have often broken down elsewhere. Small in-ternal markets and low purchasing power are bar-riers to international competitiveness and the ra-tionale for regional integration. As governmentshave moved to more market-oriented policies, atleast one impediment to integration has been re-moved. But even if agreement on its political as-pects could be reached, the benefits of integrationwifi not be attained unless regional transport andcommunications systems are upgraded.

Even as economic performance improves, it willbe offset by rapid population growth in much of

Sub-Saharan Africa. In several countries (Kenya,Senegal, and Somalia), fairly strong economicgrowth in the 1980s has yielded low or nega-tive growth in per capita GNP. Excessive popula-tion growth also exacerbates the problems of foodsecurity, education, urbanization, and environ-mental degradation.

Adjustment in the highly indebted countries

The shocks of the 1980s also hit the highly in-debted middle-income countries, most of them inLatin America, extremely hard. High commodityprices and cheap external financing fueled publicinvestment and social welfare programs during the1970s. When the external environment deterio-rated and commodity prices fell, many countriespostponed adjustment and continued to rely onexternal borrowing. Sharply rising real interestrates and falling commodity prices raised the costof external capital dramatically in the 1980s, whichled to a halt in voluntary financing. Wrenching ad-justments became necessary.

Per capita incomes in the middle-income debtorsdeclined on average during the 1980s. Restrictivedomestic policies and real devaluations reducedimports, which often led to trade and even currentaccount surpluses. These policies, combined withthe lack of external financing, meant that net in-vestment in some countries, such as Argentina,fell to zero.

The task of adjustment encompasses trade re-form, fiscal and public sector reform, and controlof inflation and debt. Most of the countries havemade substantial progress in at least one of theseareas. But the macroeconomic situation remainsunstable, and rates of investment are still low (Fig-ure 1.6).

Primary budget deficits (that is, excluding debtservice payments) have been reduced, but publicsector borrowing requirements remain high. Con-solidated, inflation-corrected deficits are stillnearly double the average for the developingworld as a share of GDP, and interest paymentsaccount for a big share of spending. Since domes-tic financial markets are in most cases too shallowto provide financing on the required scale, centralbanks have accommodated government spend-ing by expanding the monetary base. Inflationis higher than elsewhere; several of the coun-tries have seen triple- and even quadruple-digitinflation.

Heterodox anti-inflationary programs (based onwage and price controls and the fixing of the ex-change rate) have been tried, sometimes repeat-

13

edly, in Argentina, Brazil, and Mexico. Most ofthese attempts have met with outright failure.Their chief defect has been a lack of fiscal improve-ment. Stabilization programs that leave the funda-mentals inconsistent with low inflation are boundto fail. Where the fiscal deficit has been cutappropriatelyas in Mexicothe programs havebeen more successful.

Some highly indebted countries (Costa Rica,Côte d'Ivoire, and the Philippines) have adoptedfiscal programs with moderate success, althoughthe programs have yet to be sustained. Often, sev-eral years of austerity have been followed by aburst of spending that reverses the earlier gains.Such instability retards saving, investment, ex-ports, and growth. Nonetheless, some debtorcountries have made good progress on fiscal re-form. Chile, Colombia, Mexico, Morocco, andUruguay have all reduced their budget deficitsthrough tax reform, higher revenues, and lowerspending.

Some countries, again including Chile, Mexico,and Morocco, have also pursued trade reform. Forexample, since 1985 Mexico has liberalized its traderegime and maintained its competitiveness. CostaRica and the Philippines have focused on labor-intensive manufactured exports; in these countriesthe share of manufactured exports increased stead-ily between 1982 and 1987, and manufactures nowaccount for about half of all exports.

Adjustment in the centrally planned economies

The centrally planned economies face a formidablechallenge in moving toward decentralized deci-sionmaking and greater reliance on markets. Theprices of many of their products have little to dowith costs. The responsibilities of managers forproduction and investment are badly defined. Fi-nancial systems are rudimentary, and the tools ofmacroeconomic management are underdeveloped.Few mechanisms allow labor and capital to be re-allocated as economic conditions change.

Governments in many of these economies haverecognized the need for reform. The task is daunt-ing, but the benefits could be immense. The expe-rience of China during the past ten years demon-strates this. The reform of agriculture, the openingof the economy to foreign trade, technology, andinvestment, and the new reliance on incentives inthe industrial sector have led to an average growthrate of more than 10 percent a year during the1980s.

Although prices still play a relatively modest role

14

in the Chinese economy, the exchange rate adjust-ments of the early 1980s were essential in makingChinese enterprises more competitive. China hasbecome a major exporter of manufactures in a veryshort time. The Chinese government also avoidedrelying too much on external borrowing. It post-poned ambitious industrial investment programsin the late 1970s and again in the early 1980s. Morerecently it has faced difficulties in macroeconomicpolicy. Domestic credit has been allowed to ex-pand too quickly, which has led to inflationarypressures and shortages.

Economic reforms in Eastern Europe, althoughsimilar to those in China, have had less spectacularresults, and some countries are in considerable dif-ficulty. Several factors explain this. One is that lowcosts of production, at present exchange rates,have enabled China to compete successfullyagainst middle-income exporters of manufactures.In contrast, costs in Eastern Europe are generallyhigher; competing against the newly industrial-ized economies of East Asia and the lower-incomemembers of the European Community (EC) hastherefore been difficult. Moreover, some of thecountries tried to modernize their industries withheavy investment financed by foreign borrowingand without reforming economic management.This proved costly when real interest rates rose inthe 1980s.

Development issues

The slow pace of adjustment in many countries is amajor concern. But the task is neither simple norpurely economic. It requires institutional capacityand political skill. It is inhibited by vested inter-ests, for it affects acquired rights, income, benefits,rents, and costs. Where economic structures havebeen in place for some time, the pain of adjust-ment can be enormous. If reform is to last, it mustnot be rushed. The burden will have to be fairlyshared. And support from the international com-munity must be forthcoming.

Poverty, population growth, and the environment

In many countries poverty cannot be separatedfrom rapid population growth. As per capita in-comes rise, population growth rates eventually de-cline. That process has been at work in such coun-tries as the Republic of Korea and Thailand, as itwas earlier in the high-income economies. But thedemographic transition is still at an early stage insome low-income Asian countries, such as India

and Bangladesh. Africa's population is growingfaster than has that of any other region of theworld in this century. In some countries fertilityrates are close to the biological limit. This strainsthe capacity of the economy to maintain the stan-dard of living and reduces the ability of the gov-ernment to provide social services, including edu-cation and health. Yet some societies remainunconvinced of the need to reduce populationgrowth.

The links among poverty, environmental degra-dation, and population growth are often direct. Asmore and more people in poverty press upon lim-ited natural resources in rural areas, they begin todeplete the stock of renewable resources. In SouthAsia the long-term deforestation of watersheds hascaused severe erosion. Population pressure on thefragile land base in Africa and the Middle East hasbecome serious. The arid and semiarid areas of theworld are likely to face a crisis of water scarcity by2000. Desertification and deforestationoftenirreversiblehave reduced the land available foragriculture, wildlife habitats, and recreation.

But not all environmental degradation resultsfrom the pressure of population growth. Intensiveuse of hydrocarbons by high-income countries anddeforestation in sparsely populated tropical areasare starting to have global effects. The same is trueof the growing amounts of hazardous materialsthat are generated mainly by industrial countries.Some developing countries are experiencingserious air and water pollution. Increasinglyalthough with differing degrees of urgencydeveloping country governments are attemptingto curb the adverse externalities of growth.

Protectionism and trade

The acknowledged success of outward-orienteddevelopment is partly responsible for the move to-ward market-based policies. Moreover, the high-income countries recognize the role of trade in pro-moting growth and industrial development in thelow- and middle-income countriesand thus haveaccorded them a variety of concessions and prefer-ences. (These include the Generalized System ofPreferences, the EC's Lomé Convention, and theU.S. Caribbean Basin Initiative.) Despite this, anddespite the encouraging growth in world trade inrecent years, the world's trading system has be-come markedly less liberal. Governments have re-duced conventional tariff protection but haveraised other barriers to trade instead.

Specific "safeguard actions" taken by industrial

countries increasingly discriminate against the de-veloping countries. Voluntary restraint agree-ments for steel, bilateral agreements for textiles,the tighter Multifibre Arrangement (MFA), andlower quotas on sugar and other agricultural prod-ucts have their greatest effect on the exports of thedeveloping countries. The share of developingcountry exports that face nontariff barriers (NTBs)is roughly 20 percent, about twice the share of in-dustrial country exports. Much of the discussion ofNTBs focuses on manufactured goods, but the pro-portion of agricultural exports from the developingcountries facing NTBs is higher (26 percent, com-pared with 18 percent for manufactures).

Another disturbing departure from the principleof nondiscrimination embodied in the GeneralAgreement on Tariffs and Trade (GATT) is the in-crease in bilateral trade agreements. Bilateral ar-rangements couldalthough they need notnecessarilydiscriminate against nonmembers(see Box 1.1). If they do, they might greatly harmthe world trading system.

The rise of bilateralism and the increasing use ofnontariff barriers underline the importance of theUruguay Round of trade negotiations. These talksare tackling complicated issues such as trade inservices, the protection of intellectual propertyrights, and the politically contentious matter of ag-ricultural trade reform. Progress on agriculturewould be particularly welcome for some of thehighly indebted countries, such as Argentina andBrazil. Agreements on trade in financial servicesmight prepare the way for greater integration ofdomestic financial systems and international capi-tal markets, resulting in improvements in effi-ciency and resource allocation.

Many developing countries have significantlyliberalized trade in the course of their broad struc-tural adjustment programs. These steps have ben-efited the countries taking them. However, it isoften believed that countries which liberalize uni-laterally lose a bargaining chip that might havebeen used at the GATT negotiations to increasetheir access to export markets. In fact, credit isgiven in the GATT for the binding of (that is, ac-ceptance of treaty limits on) tariffs. Such commit-ments can be negotiated and traded even after tar-iffs have been unilaterally reduced.

Developing countries can also improve their ex-port prospects by following an appropriate ex-change rate policy. Many developing countrieshave corrected their overvalued exchange rates inthe 1980s; real effective exchange rates have de-clined for most developing countries (see Figure

15

Box 1.1 Project 1992 and the developing countries

The European Community (EC) plans to "complete theinternal market" by 1992 by removing barriers to thefree circulation of goods, services, and factors of pro-duction. The aim is to promote European specializa-tion, strengthen competition, and increase efficiency.But Project 1992 is bound to have substantial implica-tions for non-EC countries. The EC market accounts forabout 30 percent of the export earnings of the develop-ing countries.

To achieve the free movement of goods and serviceswithin the EC, three measures will be required, each ofwhich has an impact on the developing countries. Thefirst is the abolition of border controls. These are used toenforce national quantitative restrictions (QRs). Theyaffect mainly imports of textiles and clothing coveredby the Multifibre Arrangement, but other imports fromdeveloping economies, such as bananas from LatinAmerica and toys from Asia, are also affected. The ECmay convert national QRs into community-wide QRs.What happens will depend on the outcome of the Uru-guay Round.

The second measure is the elimination of technical bar-riers to trade. This will proceed along two separate ave-nues: mutual recognition (most barriers) and harmoni-zation (health, safety, and environmental regulations).The principle of mutual recognition implies that prod-

ucts legally marketed in one member state, whethermanufactured in the EC or imported into the EC, cancirculate freely throughout the EC. This should be es-pecially welcome to relatively small suppliers in thedeveloping countries, since the added costs of techni-cal barriers are particularly onerous for them.

The third measure is the opening up of public procure-ment. This will extend to four key areas not covered bythe relevant GATT code: energy, telecommunications,transport, and water supply. To the extent that publicprocurement concentrates on high-technology sectors,the change will matter more to the industrial than tothe developing countries.

If Project 1992 promotes faster domestic growth with-out raising external trade barriers, Europe will importmore, and the developing countries would benefit. Thedistribution of the new demand among exporters willdepend on its composition and on existing trade pref-erences. The main focus of Project 1992 is on trade inmanufactures. The effects of the single market on de-veloping countries will depend on their competitive-ness and on the EC's trade policy toward them. Thenature of EC trade preferences toward different groupsof developing countries may also change as a result ofthe introduction of a unified market.

1.7). Countries with an appropriate real exchangerate have usually experienced faster and more sta-ble growth than the rest. As development pro-ceeds, it becomes even more important to adoptand maintain an industrialization strategy that isneutral toward production for domestic or foreignmarkets.

In the Uruguay Round the developing countriesare for the first time playing a significant role inmultilateral trade negotiations. Thirteen develop-ing and industrial countries have formed theCairns Group to promote their common interestsas agricultural producers. The developing coun-tries have recognized their stake in the world trad-ing system. This reinforces the need for a success-ful conclusion to the Uruguay Round and foradherence to the spirit as well as the letter of theprinciples of the GATT. The proposed strengthen-ing of the GATT, including its surveillance of coun-tries' trade policies, should help to bring thisabout. The failure of the Uruguay Round wouldnot only hamper the growth of world trade butalso represent a rejection of the development strat-egy that has been promoted by the international

16

community and multilateral organizations, at thevery time that developing countries are coming toaccept it.

The debt problem

Although many developing countries have haddifficulty in servicing their external debt, from thestart of the debt crisis in 1982 the focus has been onthe seventeen highly indebted middle-incomecountries whose debts are primarily to the com-mercial banks. This reflects the systemic risk thatthe failure of creditor banks might have posed tothe international financial system in the early yearsof the crisis. Although some banks remain at risk,the debt strategy they have followed since 1982 hassought to remove this systemic risk by building upappropriate provisions for doubtful assets. In thepast few years the debt problems of Sub-SaharanAfrica have won official recognition. These prob-lems differ from those of the other highly indebtedcountries in that the debt is owed mainly to gov-ernments. Nonetheless, virtually all the debtorcountries have been adversely affected by the rise

in real interest rates and the decline in commercialbank lending since 1982.

Systemic collapse has been avoided. But formost of the highly indebted countries the debt cri-sis has become a growth crisis as well. In 1988 theygrew by less than 2 percent, failing to respondboth to high export demand and to the rapidgrowth of the high-income countries. (Export vol-ume increased by about 6 percent, and dollar unitvalues rose by more than 15 percent in a delayedreaction to the sharp depreciation of the dollar.)Their situation did show one sign of improvementduring 1988, however. The ratio of debt stock toexports declined for the first time since 1982. Nev-ertheless, two major Latin American debtors (Ar-gentina and Brazil) experienced significant eco-nomic instability during the year.

Korea has shown that it is possible to grow out ofa heavy debt burden. But when commercial cred-itors are reluctant to increase their exposure incountries with debt problems and domestic sav-ings are transferred abroad to service the debt, bor-rowers cannot finance the investment they need togenerate growth. The resources for investmentcould come from higher domestic saving or fromrepatriated capital. Before 1982 the highly indebtedcountries received about 2 percent of GNP a yearin resources from abroad; since then they havetransferred roughly 3 percent of GNP a year in theopposite direction. Domestic saving would havehad to rise by 5 percent of GNPor in other wordsby about a quarterto offset this change in nettransfers. Despite strong fiscal contraction in somecountries, none of the countries has succeeded inrestoring adequate net investment (see Box 1.2).

The Baker initiative of 1985 stressed the need tomaintain net flows of funds from official and pri-vate lenders. Although net flows of long-term cap-ital from official creditors averaged nearly $6 billiona year over the past three years, net flows fromcommercial banks fell to an average of less than $2billion a year.

During 1988 and 1989, governments and creditorbanks alike concluded that debt reduction wouldhave to be an element in resolving the debt crisis.Creditor governments agreed at the 1988 Torontosummit to grant debt relief to the poorest and mostheavily indebted countries, such as the countriesof Sub-Saharan Africa. The Paris Club subse-quently agreed on the equivalence among the vari-ous types of debt relief granted by different credi-tor governments. For private creditors, the menuapproach that has been developed since 1986 hascreated a variety of voluntary methods of debt re-

Figure 1.7 Real effective exchange rates indeveloping countries by region, 1978 to 1988

Index (1978 = 100)

140

130

120

110

100

90

80

70

60

50

Latin Americaand the Caribbean

Europe,Middle Eastand North Africa

East Asia

Sub-Saharan Africa

1978 1980 1982 1984 1986 1988

Note: The real effective exchange rate is the trade-weighted ex-change rate adjusted for relative inflation. An increase in theindex indicates an appreciation of the currency. The regionalindex values, which are based on a total sample of eighty-threedeveloping countries, are annual averages weighted by the dol-lar value of exports.Source: IMF and World Bank data.

duction. These include debt buybacks (in which adebtor buys back part of its foreign debt with ei-ther international reserves or new foreign ex-change), exit bonds, and debt-equity swaps. In allthese cases the benefits for the debtor vary accord-ing to the discount at which it acquires its existingdebt. In 1988 the commercial banks reached a ma-jor refinancing agreement with Brazilat $82 bil-lion, the largest on recordwhich contained finan-cial innovations allowing for debt reduction. Butfor the highly indebted countries in general, thenet reduction in external obligations achieved todate has been small.

The prolongation of the debt crisis, and particu-larly its manifestation in the low growth rates ofheavily indebted countries, led the internationalcommunity to reevaluate the debt strategy in 1989.

17

Box 1.2 Debt concepts

A variety of concepts are used to measure and assessthe economic burden of external debt.

Debt stock, which is often reported as debt outstand-ing and disbursed, measures the total debt liabilities ofthe debtor. The payment obligation arising from this isdebt service and comprises interest and principal pay-ments. The debt stock does not necessarily predict thedebt service because currency revaluations, interestrates, and the maturity structure of the debt all affectdebt service.

Two concepts describe the net effect of borrowingand repayments on the flow of financial resources. Netflows refers to disbursements minus principal repay-ments. It measures whether new financing exceedsdebt being retired. If debt levels remain prudent, netflows should be positive in all but the most advancedlow- and middle-income countries because of contin-ued external financing for domestic investment. Nettransfers refers to disbursements minus interest andprincipal repayments. Negative net transfers implythat total debt service payments exceed gross inflows,that net real resources are being transferred from theeconomy, and that a trade surplus is thus required.When the real interest rate exceeds the growth rate,any borrower must expect eventually to make nettransfers to its creditors. At that stage the borrower'sincome should have risen sufficiently for its saving tofinance the transfer. The increase in the real interest

Box table 1.2 Long-term lending to developing countries, 1981 and 1987(billions of dollars, unless otherwise noted)

rate in the early 1980s forced many developing coun-tries to make net transfers abroad much earlier thanthey had expected.

Moratoria (the suspension of contractual debt servicepayments), arrears (overdue service payments), newmoney (additional borrowing), rescheduling (changingthe time profile of repayments without altering the to-tal debt obligation), and debt relief are all ways of alter-ing either the pattern or size of repayment flows.Forward-looking and sustainable changes in debtstructure are more likely to create the environmentneeded for domestic investment and growth than arearrears or annual renegotiations.

Box table 1.2 shows how the burden of debt of thedeveloping countries has changed during the 1980s.Debt stocks in Latin America and Sub-Saharan Africahave grown as a share of GNP during the 1980s, butprivate credit flows now represent a much smallershare of gross disbursements, especially to LatinAmerica.

Net flows remain positive, except to middle-incomeEast Asia; these countries are repaying debt out of effi-ciently invested borrowing. In most developing coun-tries net transfers have turned sharply negative. Exceptin Sub-Saharan Africa and low-income Asia, resourcesare being transferred to creditors at rates significantlyhigher than those at which resources were received in1981.

Note: Data are based on the sample of 111 Countries participating in the Debtor Reporting System.Gross disbursements minus principal repayments.Gross disbursements minus the sum of interest and principal payments.

18

Alldevelopingcountries

Sub-Saha ranAfrica

Middle-income

East Asia

Low-income

Asia

Europe,Middle East,

andNorth Africa

LatinAmericaand the

Caribbean

Item 1981 1987 1981 1987 1981 1987 1981 1987 1981 1987 1981 1987

Total long-term debt out-standing and disbursed 503 996 50 109 50 102 60 142 134 260 209 384

As a percentage of GNP 23 42 26 85 28 40 8 16 30 47 27 52

Gross disbursements oflong-term lending 124 87 11 9 14 11 11 21 28 27 61 20

Private sources 92 49 6 3 10 8 5 10 17 18 53 10As a percentage of total 74 56 58 32 75 73 45 48 62 68 88 49

Multilateral sources 12 22 2 4 2 2 3 6 2 5 3 6

Net flows' 77 16 8 5 10 9 6 11 14 3 39 5

Private sources 53 2 4 1 7 8 2 4 7 7 34 1

Multilateral sources 10 12 2 3 1 0 2 5 2 2 2 3

Net transfersb 35 38 6 2 6 16 4 5 4 12 16 19

Although the details of the new strategy are stillbeing worked out, the overall framework is clear.Debt reduction will receive official support and of-ficial funding from the IMF and the World Bank,provided it takes place in the context of strong,effective adjustment programs. The strategy willcontinue to treat each country separately and islikely to evolve as particular countries reach newagreements with their creditors and official agen-cies. It will aim to reward those countries that havetried hardest to restructure their economies. Veryfew creditor governments will be willing to con-tribute resources directly, but they are reviewingregulatory and accounting obstacles that might im-pede debt relief by private creditors. They will alsoencourage the creditor banks to waive the clausesin existing agreements that make debt reductiondifficult to arrange.

The new strategy recognizes that debtor coun-tries will continue to need new money fromabroad. The question arises whether debt reduc-tion is consistent with new lending from existingcreditors. The stakes for banks in some of thelarger countries are high enough for them to con-tinue to provide new money, even as they simulta-neously agree to reduce debt. But some banks willnot want to reduce debt and provide new moneyat the same time. Official financing will continue.Increasingly, countries will have to look to newforms of external finance, such as direct and port-folio equity investment, and to the return of flightcapital.

The most critical component of the debt strategyremains continued adjustment by the debtor coun-tries. Without strong adjustment, no debt strategycan restore growth. It is the goal of the new strat-egy to ensure that countries that do pursue seriousadjustment policies will be able to return togrowth.

The debt crisis ifiustrates the fundamental ten-sion between dependence on private markets onthe one hand and government intervention on theothera theme that recurs later in this Report. Be-cause commercial banks were heavily exposedwhen the debt crisis began in 1982, creditor gov-ernments intervened to ensure the stability of theinternational financial system. Individual debtorgovernments, such as those of Argentina, Chile,and Yugoslavia, acquired large amounts of privatedebt in the belief that doing so would help them topreserve relations with the commercial banks. Ifthe exposure of the banks had been small enoughto pose no threat to their solvency, they mighthave reached agreements with the debtors on their

own. And then the crisis would have taken a verydifferent course.

Growth prospects

Uncertainty after the stock market crash of 1987reduced expectations of growth early in 1988.Those expectations were confounded by a year ofstrong growth, which has bolstered the prospectsfor a gradual return to trend growth of about 3percent for the high-income OECD countries. Ex-pansion in Japan and Europe, especially in Ger-many and the United Kingdom, broadens the basisfor sustained growth. Moreover, the high rate ofinvestment in 1988 should increase capacity andproductivity, which will help to ease inflationarypressures.

Lingering uncertainties, however, cloud themedium-term forecast. They concern the policychanges needed to reduce large domestic and in-ternational imbalances and to offset growing irifla-tionary pressures in several of the large econo-mies. The United States can continue to run acurrent account deficit only if foreign investors andgovernments are willing to purchase its assets.This, in turn, depends on their expectations withregard to economic stability in the United States,the U.S. fiscal deficit, and U.S. interest rates rela-tive to those in other economies. Moreover, withinEurope, major imbalances could strain the Euro-pean Monetary System. The scale of these interna-tional imbalances, concern about inflation, andneeded adjustments in monetary policy are likelyto cause volatility in interest rates and exchangerates over the near term.

Accordingly, the World Bank has prepared twoviews of the next decade. One scenario is predi-cated on adjustment with growth. It assumes thatcredible policy actions are taken to reduce the mac-roeconomic imbalances within and among the in-dustrial countries. Such measures include a pro-gram to reduce the U.S. budget deficit, followedby an easing in monetary policy (more so in theUnited States than elsewhere). Real and nominalinterest rates therefore fall, as compared with the1980-88 averages, and the dollar depreciates fur-ther against the currencies of the other big indus-trial countries. Structural adjustment policies ofthe kind discussed above enable the low- andmiddle-income countries to take advantage ofgrowth; the lower interest rates ease their debtburden. This combination of plausible adjustmentsby both high-income and low- and middle-incomegovernments yields, overall, good prospects for

19

Table 1.1 Selected economic indicators in the adjustment-with-growth and low scenarios

20

world growth through the year 2000. Even so,many low- and middle-income countries would beunlikely to achieve the high growth rates they ex-perienced in the 1960s and 1970s.

The alternative is the low scenario. It assumesthat the appropriate policy actions are taken nei-ther in the high-income countries nor in certain ofthe low- and middle-income countries. Crisis isaverted through continued financing of the im-balances, but the low scenario entails great macro-economic uncertainty, higher real and nominal in-terest rates, increased protectionism, and lowergrowth.

Key factors underlying these two scenarios aresummarized in Table 1.1. With adjustment, realGDP growth in the high-income OECD countriesaverages 2.6 percent over the medium term (1988-95) and rises to trend growth of about 3 percent bythe year 2000. Inflation measured in local curren-cies averages about 4 percent a year. Some adjust-ment by the United States as well as other in-creases in world saving lower real interest rates to3.0 percent from their average of 5.5 percent in the1980s. Merchandise exports of the low- andmiddle-income countries should grow by morethan 5 percent a year, with the demand for manu-factured exports rising at more than 7 percent ayear. A bias toward investment helps to raise com-modity prices in nominal terms, but in real terms(deflated by the unit value of manufactures) theyare expected to continue to decline through 1995.This underlines the need for the developing coun-tries that rely on primary commodity exports todiversify their economies.

Note: The adjustment-with-growth scenario assumes the adoption of policies (by the major industrial and developing countries) that reducestructural rigidities and imbalances and allow for a gradual return to trend through the year 2000. The low scenario assumes that some neededpolicy changes are not made, interest rates remain high, growth falters, and there is increased protectionism.

Average six-month rate on Eurodollar deposits.Nominal interest rate deflated by the GDP deflator for the United States.

Without appropriate policy changes, the low sce-nario shows growth in the high-income OECDcountries slowing to 2.4 percent a year in the me-dium term and through 2000. That is significantlyless than the average for the 1970s and 1980s.Growth in trade is correspondingly lower. Moreimportant, the failure to right macroeconomic im-balances keeps real and nominal interest rates high(about 4 and 10 percent respectively). Lower exter-nal demand and higher interest rates reduce theprospects for growth in the low- and middle-income countries to below the averages of the1980s.

How does the adjustment-with-growth scenarioin the high-income countries affect the growthprospects of the low- and middle-income coun-tries? The answer largely depends on their ownpolicy adjustments and on population growth.East and South Asian countries, which have stablemacroeconomic environments and a substantialshare of manufactures in exports, are expected togrow at about 6 percent a year (see Table 1.2).Some of them are likely to "graduate" to the high-income category. Moreover, because their popula-tion growth is expected to slow, per capita incomein some countries rises by more than 5 percent ayear. Per capita income in the region as a wholerises by 4.3 percent a year. Prospects for internalfinancing of investment in physical and humancapital are good. Even in the low scenario, theAsian development effort is expected to continueto succeed.

As structural adjustment proceeds, real GDPgrowth in Sub-Saharan Africa is expected to aver-

(average annual percentage change)

Indicator

Trend

for1965-8 7

Recentexperience,

1980-88

Scenario for 1988-95

Adjustmentwith growth Low

High-income OECD countriesGDP growth 3.1 2.7 2.6 2.4Inflation (local currency) 6.4 5.6 4.2 4.1Nominal rate of interesta 8.8 10.2 8.6 9.5Real rate of interestb 3.0 5.5 3.0 4.0

Low- and middle-income countriesMerchandise export volume 3.8 5.4 5.1 4.1

Manufactures 12.0 10.0 7.4 5.7Primary goods 1.3 2.5 2.8 2.7

Merchandise import volume 4.3 0.5 5.7 4.6

age 3.2 percent a year through 1995, before acceler-ating in the second half of the decade. But withpopulation growing at nearly the same rate, percapita real income for the region stagnates. Evenwith an optimistic view of adjustment, the region'sper capita income will not return to the level of themid-1960s over the projection horizon. More, andmore effective use of, external financing will beneeded to keep Sub-Saharan Africa from fallingfurther behind. These prospects reinforce the viewthat policies-internal and external-require con-tinued adjustment.

If certain countries in Latin America and in Eu-rope, the Middle East, and North Africa make thenecessary economic adjustments, and if these poli-cies revive investment, these regions could do bet-ter over the next decade than they have in the1980s. Per capita income is expected to grow againin Latin America, but at only about 1 percent ayear; this rate is probably insufficient for the eco-nomic revitalization that is necessary for LatinAmerica to keep pace with other parts of theworld. Per capita income should grow morestrongly than hitherto in the developing countriesof Europe, the Middle East, and North Africa. Butwithout internal reform, external stimulus, andlower interest rates, there is a real danger that theeconomic situation in much of the middle-incomeworld could deteriorate further.

Debt reduction scenario

Recent discussions of debt relief suggest a thirdscenario. This combines a reduction in the debtburden of the highly indebted countries with the

Table 1.2 Growth prospects in the adjustment-with-growth and low scenarios(average annual percentage change)

shift in the macroeconomic policy mix of the indus-trial countries that is part of the adjustment-with-growth scenario. Under this illustrative scenario,debt stocks are reduced by 20 percent over threeyears.

The reduction in net resource transfers in theform of interest payments associated with the re-duction in debt stocks could be as much as $5 bil-lion to $6 billion over three years. If the reductionin interest payments is used to import needed in-vestment goods, investment rates would rise byseveral percentage points. As a result of the debtreduction, GDP for the highly indebted countriescould be about 1 percent higher at the end of thethree years.

Even though all countries are treated similarly inthis scenario, some countries fare better than oth-ers because countries react differently to increasesin imports and investment. For example, the po-tential increase in GDP for Argentina, Brazil, Mex-ico, and Nigeria could be as much as 2 percenteach. Recent initiatives envisage different coun-tries receiving different levels and kinds of debtreduction on the basis of their adjustmentprograms.

The models underlying this scenario tie invest-ment directly to resource flows and thus omit twokey unquantifiable elements in debt reduction.First, a reduction in the debt overhang is likely toincrease the probability that the country can meetfuture interest obligations; this will significantlyimprove the investment climate and thereby bothincrease investment and at some stage encouragethe return of flight capital. Second, if debt reduc-tion leads to a sharp decline in new money, and

Country group

GDP growth GDP per capita growth

Trendfor

1965-87

Recentexperience,

1980-88

Scenario for1988-95 Trend

for1965-87

Recentexperience,

1980-88

Scenario for1988-95

Adjustmentwith growth Low

Adjustmentwith growth Low

Low- and middle-incomecountries 5.0 4.0 4.6 3.7 2.7 2.0 2.7 1.8

Excluding China and India 4.8 2.6 3.8 3.0 2.2 0.2 1.5 0.7Sub-Saharan Africa 3.4 0.5 3.2 3.1 0.6 -2.5 0.1 -0.1Asia 6.2 7.3 6.0 4.9 4.0 5.5 4.3 3.2Europe, Middle East,

and North Africa 4.6 2.9 3.5 2.8 2.4 0.7 1.6 0.8Latin America and

the Caribbean 4.7 1.7 3.1 2.3 2.1 -0.6 1.2 0.4Seventeen highly indebted

countries 4.6 1.3 3.2 2.3 2.0 -1.2 1.0 0.2High-income OECD countries 3.1 2.7 2.6 2.4 2.3 2.1 2.1 1.9

21

Figure 1.8 Domestic and external liabilities in selected developing countries,1975, 1981, and 1987(percentage of GNP)

120

100

80

60

40

20

0

1975

Côte divoire

1981

I

1987

80

60

40

20

0

Domestic liabilities

Long-term external debt

India

1975 1981 1987

Note: Domestic liabilities are defined as total liquid liabilities of the financial system (International Financial Statistics, line 551), expressed inlocal currency. External debt is total long-term debt outstanding and disbursed, expressed in U.S. dollars at current exchange rates.Source: IMF and World Bank data.

possibly even to an increase in negative net trans-fers, investment will drop. These considerationsreinforce the view that continued and powerfulstructural adjustment by the debtor countries re-mains the most important ingredient in dealingwith the debt problem.

22

80

60

40

20

0

1975

Beyond the debt crisis

All the evidence points to continued low capitalflows to the developing countries in the comingdecade. Official flows cannot fully offset the sharpreduction in private flows. This underlines the

Thailand

1981 1987

Table 1.3 Selected capital flows to developing countries, 1981 and 1987

need for developing countries to adopt economicpolicies that increase domestic saving and ensurethat resources are used as efficiently as possible. Inthis, the financial sector can play a crucial role.

There is little doubt that over the past fifteenyears many developing countries have relied toomuch on external borrowing and too little on do-mestic resources. In a sample of thirty-eight devel-oping countries for which data on the liabilities ofthe domestic financial system were available, ex-ternal debt at the end of 1986 exceeded domesticdebt by more than 50 percent. For Latin America,external debt was on average two-and-a-half timesgreater than domestic bank liabilities. This showshow much these countries have come to dependon external financing. Figure 1.8 illustrates therange of experience. In countries with rapidly ex-panding external debt and shallow domestic finan-cial systems, such as Côte d'Ivoire and the Philip-pines, external liabilities were two to five timesgreater than domestic bank liabilities. India andThailand, in contrast, have relatively deep domes-tic financial systems; they have consciously limitedtheir recourse to external financing.

One lesson of the debt crisis is that commercialbank lending at floating rates is not the ideal formof financing for long-term development. It exposesthe borrower to interest rate and exchange ratefluctuations, and it does not tie the borrower'spayments to the outcome of the investment. Alter-native forms of finance-foreign direct and portfo-lio investment and commodity bonds, for exam-ple-distribute risk between creditor and debtor.Borrowing countries may also hedge their cur-rency exposures by adjusting the currency compo-sition of reserves and borrowings to reflect thelikely impact of exchange rate and commodityprice changes on their future cash flows.

Foreign direct investment has been an important

Note: Data are based on the sample of 111 countries participating in the Debtor Reporting System. Data exclude Certain countries with significantflows associated with offshore banking activities.Source: OECD and World Bank data.

source of financing for economies at all levels ofincome (see Table 1.3). It frequently brings addi-tional benefits: access to new technologies or tomarkets in which the foreign investing firm is ac-tive. It is also likely to bolster competition in do-mestic markets. During the 1980s foreign direct in-vestment in developing countries has been stable,averaging $10 billion to $15 billion a year (about10-15 percent of total capital inflows). The relativestability of the aggregate flow masks importantchanges in its size, sourcing, and composition indifferent low- and middle-income countries. Thedirection of foreign direct investment is stronglyinfluenced by political and economic stability andby policies toward trade and capital flows. Restric-tions on profit repatriation and access to foreignexchange are especially important (see Box 1.3).Foreign direct investment has to be servicedthrough profit remittances, and it may be a moreexpensive source of finance than borrowing. But aslong as it provides access to international markets,better technology, and greater domestic competi-tion, it should be welcomed by most developingeconomies.

Other forms of risk sharing between developingcountries and the international capital marketshave been very little developed to date. Some oilbonds have been sold, and some deals have beencollateralized by commodity exports. The rapid fi-nancial innovation of the past decade can be ex-pected to spread to developing countries in duecourse.

Foreign aid also remains an important source ofexternal finance, particularly for low-income coun-tries in Sub-Saharan Africa. Some industrial coun-tries, notably Japan, have expanded their overseasdevelopment assistance in the 1980s. By early 1989Japan had extended nearly 90 percent of the $30billion program announced in 1987 to "recycle"

23

(billions of dollars)

Official development assistance Foreigndirect

investmentTotalOfficialgrants

Country group 1981 1987 1981 1987 1981 1987

All developing countries 24.5 30.4 14.5 20.0 10.2 9.5Sub-Saharan Africa 7.1 11.1 4.9 7.3 1.3 0.8Middle-income East Asia 1.8 2.2 0.9 1.5 1.8 2.5Low-income Asia 5.3 7.2 2.7 3.5 0.2 1.3Europe, Middle East, and North Africa 8.2 6.3 5.1 5.0 1.3 0.8Latin America and the Caribbean 2.1 3.6 0.9 2.7 5.6 4.1

Box 1.3 Foreign equity investment

Economic policies that promote sustainable growth arealso likely to attract foreign equity investment. Investorsurveys show that growth and stability of the hosteconomy are key factors in determining the attractive-ness of a foreign investment. In part, this is becauseequity investment is relatively illiquid and sometimesrequires a lengthy development phase before earningpositive returns. When the foreign investment pro-duces for the host market, as in Brazil and Korea, theinvestor's concern with the long-term macroeconomicenvironment is reinforced.

Industrial and trade policies also strongly influenceforeign investment. Outward-oriented strategies sup-ported by tax, foreign exchange, and other policiesusually attract more foreign equity investment, espe-cially to the export processing sectors. Transparent andconsistent investment policies are important. Singa-pore, for example, treats foreign investments on essen-tially the same terms as domestic investments. It has

attracted large flows which, along with domestic in-vestment, have contributed to rapid growth.

Mauritius shows that policies to provide incentivesfor foreign investment can work, provided the macro-economic environment is stable. To attract foreign in-vestment and diversify from its traditional reliance onraw sugar, it adopted an Export Processing Zone pro-gram in 1970. Mauritius successfully expanded theshare of manufactures from almost nothing to 24 per-cent of total exports by 1977. But growth slowed in thelate 1970s and early 1980s, partly because of failures inmacroeconomic policy (currency overvaluation, fiscaloverexpansion, and a tax policy that discouraged do-mestic saving). Foreign investment plummeted. Thecountry adopted a structural adjustment program inthe early 1980s that called for better credit allocation, anexpansion of term finance for the private sector, andinvestment policies aimed at further export diversifica-tion. Growth and foreign investment have revived.

funds to developing countries. Saudi Arabia con-tinues to provide 3 percent of GDP in developmentaid, and Kuwait has recently provided 2 percent.In general, however, low oil prices in the 1980shave prevented the high-income oil-exportingcountries from maintaining their aid programs.

Moving beyond the debt crisis calls for effort bydebtor and creditor alike. Credible and sustainablestructural adjustment is necessary to encourage

24

the return of flight capital and to ensure that do-mestic and external resources are made availableand are put to productive use. And creditors needto be more imaginative in their lending; they musttailor the form and maturity of financial flows tothe characteristics of the projects being financed.The creativity of the international capital marketsshould be brought to bear on the problems of thedebtor countries.

Financial systems provide payment services. Theymobilize savings and allocate credit. And theylimit, price, pool, and trade the risks resultingfrom these activities. These diverse services areused in varying combinations by households, busi-nesses, and governments and are renderedthrough an array of instruments (currency, checks,credit cards, bonds, and stocks) and institutions(banks, credit unions, insurance companies,pawnbrokers, and stockbrokers). A financial sys-tem's contribution to the economy depends uponthe quantity and quality of its services and the effi-ciency with which it provides them.

Financial services make it cheaper and less riskyto trade goods and services and to borrow andlend. Without them an economy would be con-fined to self-sufficiency or barter, which would in-hibit the specialization in production upon whichmodern economies depend. Separating the timingof consumption from production would be possi-ble only by first storing goods. The size of produc-ing units would be limited by the producers' owncapacity to save. Incomes would be lower, andcomplex industrial economies would not exist.

Finance is the key to investment and hence togrowth. Providing saved resources to others withmore productive uses for them raises the income ofsaver and borrower alike. Without an efficient fi-nancial system, however, lending can be bothcostly and risky. Self-financed investment is one

way to overcome these difficulties, but profitableinvestment opportunities may exceed the re-sources of the individual enterprise. Investment bythe public sector is another answer; in this caseadditional savings are mobilized through the taxsystem. But excessive centralization brings its owndifficulties, especially in gathering the informationneeded to make sound investments. Efficien-cy therefore requires a balance among internallygenerated resources, centrally organized savingand investment, and market-based financialarrangements.

Market-based arrangements are voluntary. Assuch they are driven by the desire for profit, tem-pered by concerns about risk. Competition ensuresthat transaction costs are held down, that risk isallocated to those most willing to bear it, and thatinvestment is undertaken by those with the mostpromising opportunities.

Such arrangements may take many forms buttend to mirror an economy's complexity and politi-cal orientation. Informal finance, such as loanswithin families and between friends or from pawn-brokers and moneylenders, is still important inmany countries. But as economies grow, these ar-rangements need to be augmented by the servicesthat only formal institutionscommercial banks,collective investment institutions, and capitalmarketscan supply. For example, by transform-ing the size and maturity of financial assets, formal

25

Box 2.1 Life without money

"Some years since, Mademoiselle Zelie, a singergave a concert in the Society Islands . . in exchangefor a third part of the receipts. When counted, hershare was found to consist of three pigs, twenty-threeturkeys, forty-four chickens, five thousand cocoa nuts,besides considerable quantities of bananas, lemons andoranges . . . as Mademoiselle could not consume anyconsiderable portion of the receipts herself, it becamenecessary in the meantime to feed the pigs and poultrywith the fruit.''

W. S. JevonsMoney and the Mechanism of Exchange

(Jevons 1898, p. 1)

Even in modern economies many transactions do notinvolve money. For example, barter is used to escapetaxation and regulation. In developing countries mostexchanges within extended families are handled with-out cash. The multiple incomes of an extended familyoffer a substitute for insurance, pension plans, and so-cial security. In many areas of the world, share-cropping involves a series of nonmonetary transactionsconcerning inputs, land tenure, crop sales, and so on.

In some countries neighbors help one another to buildtheir houses without payment (gotong rogong in Java,barn raising in the United States).

The economy of ancient Egypt operated for 2,000years before the invention of money (although pre-cious metals served as a medium of exchange for sometransactions). Even after several surrounding statesadopted coinage, the government of Egypt opposedthe use of money. The Inca Empire of Peru may nothave used money as a medium of exchange, despitebeing exceptionally rich in gold and silver. Some reli-gious societies (including the almost self-sufficient Je-suit Republic of Paraguay in the sixteenth and seven-teenth centuries) and authoritarian or paternalisticcommunities (such as the large haciendas of Latin Amer-ica) make little or no use of money, at least for internaltransactions.

Nonmonetary transactions tend to be aspects of alongstanding social compact, whose individual partscannot be valued separately. But in advanced econo-Inies most exchanges are impersonal. As MademoiselleZelie discovered, trade can be quite costly without awidely accepted medium of exchange.

institutions can mediate between the many smalldepositors who prefer liquid assets and the fewlarge borrowers who need long-term loans to fi-nance investment. They can provide other usefulservices too: insurance, hedging (using optionsand futures contracts), and so on. In a diversifiedmarket-based system, governments retain a keyrole as prudential regulators, because experiencehas shown that financial marketsessentialthough they arecan be prone to instability andvulnerable to fraud.

Finance and growth

Malthus predicted that growing populations andfixed amounts of land and other natural resourceswould ultimately stifle economic growth. But natu-ral resource endowments have declined in impor-tance in most high-income countries. In Great Brit-ain, for example, the value of land and mineralswas 60 percent of the value of all tangible assets in1688 but only 15 percent in 1977. In fact, naturalresources have not determined wealth. In 1870,Australia, a country rich in natural resources, hadtwice the per capita income of Switzerland, whichhas few; today Switzerland's per capita income ex-ceeds Australia's by more than half. During the

26

past three decades Hong Kong, Japan, the Repub-lic of Korea, and Singapore have had among theworld's highest per capita income growth rates de-spite their relatively poor resource endowments.Resource-rich Argentina has hardly grown at all.

The biggest difference between rich and poor isthe efficiency with which they have used their re-sources. The financial system's contribution togrowth lies precisely in its ability to increaseefficiency.

Finance and trade

The financial system makes its biggest contributionto growth by providing a medium of exchange. Ina barter economy, trade requires a "mutual coinci-dence of wants." It is therefore limited by thecostly search for trading partners. Specialization isdiscouraged in economies with no medium of ex-change, so their productivity is low. Money facili-tates specialization by reducing trading costs andlinking different markets. The adoption of a stan-dard unit of account serves the same goal (see Box2.1).

Historically, economies moved first from basicself-sufficiency to barter trade and then to tradeagainst commonly accepted commodities such as

gold. Maintaining inventories of commoditymoney was costly, and the safekeepers of gold andother commodity monies soon learned the advan-tages of allowing the direct exchange of depositcertificates. Such economizing on the use of com-modity money gave birth to deposit money andbanking. The continuing search for cheaper meansof payment led to paper money, credit cards, andelectronic transfers.

Most developing countries have a widely ac-cepted medium of exchange, although they willneed more advanced payment systems as theireconomies become larger and more complex. But,some countries, particularly in Latin America,have failed to provide a currency with a stablevalue. In inflationary economies local currency be-comes less acceptable as a medium of exchange.Inflation also undercuts money's use as a unit ofaccount: it makes financial contracts riskier, re-

duces the information imparted by relative prices,and distorts the allocation of resources.

Finance and saving

Saving determines the rate at which productivecapacity, and hence income, can grow. On aver-age, the more rapidly growing developing coun-tries have had higher saving rates than the slower-growing countries (see Table 2.1). These rates areinfluenced by many factors. In analyzing them it isuseful to distinguish between the flow of "saving"and the stock of "savings." In this Report, "sav-ing" will always refer to the flow of real resourcesthat are not consumed in the period under studyand that are therefore available for investment."Savings" will refer to the stock of accumulatedsaving, or wealth. An increase in the stock of fi-nancial assets will be called "financial deepening."

Many factors affect the saving rate: the rate ofincome growth, the age composition of the popu-

Note: Data are weighted averages times 100 and are based on a sample of eighty developing countries. M2 is currency in circulation plus demand,time, and savings deposits at banks. Investment is gross domestic investment.a. Because of lack of data, average is for 1977-87 only.Source: IMF, International Financial Statistics, and World Bank data.

lation, and attitudes toward thrift. The servicesprovided by government, such as social security,can affect saving, as can taxes and governmentdeficits. Macroeconomic and political stability af-fect expectations and thus affect saving. Whetherfinancial variables affect the saving rate is still anopen question.

Liquidity and ease of access may make financialinstruments a more attractive home for savings.And financial services may encourage saving ifthey raise the net returns. Higher interest ratesraise the return, but they can also enable savers toachieve a target stock of financial wealth with alower saving rate. The effect of higher interestrates is therefore ambiguous. Empirical estimatesrange from a large positive effect to no effect at all.

Although interest rates have an uncertain effecton the amount people save, their effect on theform in which people save is clear. High interestrates favor financial over nonfinancial forms of sav-ing. A recent study using 1985 data for eighty-onedeveloping economies found that the ratio of liq-uid liabilities to GNP (a measure of financial depth)rose by 0.75 percentage point in response to a 1.0percentage point increase in the nominal interestrate paid on deposits. However, the ratio fell by1.70 percentage points in response to a 1.0 percent-age point increase in the rate of inflation. (Thisasymmetry may reflect the fact that some liquidliabilitiescurrency, for examplepay no interestand thus cannot fully compensate savers for infla-tion. It may also reflect a risk premium that riseswith the inflation rate.) Overall, higher real inter-est rates are likely to lead to financial deepening assavers switch some of their saving from real tofinancial assets and from foreign to domestic as-sets. Conversely, the negative real interest ratesthat many countries saw during the 1970s discour-aged the holding of financial assets.

Governments can influence financial saving in

27

Table 2.1 Saving and growth in developing countries, 1965 to 1987

Country group byGDP growth rate

Gross nationalsavingslGDP

Gross

investmentlGDPChange in

GDP/investment M2/GDP

High growth (over 7 percent)Seven countries 28.0 28.6 26.3 43.Oa

Excluding China 23.2 26.7 33.1

Medium growth (3-7 percent)Fifty-one countries 18.5 22.6 23.6 31.2

Low growth (less than 3 percent)Twenty-two countries 19.0 19.0 10.1 23.8

other ways too. By imposing direct taxes on banks,by requiring banks to hold noninterest-bearing re-serves at the central bank, or by forcing banks toinvest in low-interest government bonds, they re-duce the return on bank deposits. Historically,governments raised finance by debasing commod-ity money. Today they do the same by grantingthemselves a monopoly in the creation of currency.The rent earned from this monopoly is called sei-gniorage (see Chapter 4). The more governmentsrely on it for revenue, the less savers are inclinedto hold their wealth in financial form. As discussed

Figure 2.1 Average saving and investment rates and sectoral surpluses and deficitsfor fourteen developing countries(percentage of GNP)

28

Saving

Sector surplus

Investment

Sector deficit

Self-financed investment

Households-ABusiness

Government1.9

1.9

7.0

Foreign

Financial sector

Note: Data are based on the sample of fourteen developing countries listed in Table 2.2.Source: Honohan and Atiyas (background paper).

in the next section, the amount saved in financialform affects the productivity of investment.

Finance and investment

The financial system intermediates only part of acountry's total investment, because firms andhouseholds finance much of their investment di-rectly out of their own saving. Only when invest-ment exceeds saving is it necessary to borrow, justas when saving exceeds investment it is necessaryto lend. The financial system's task is to move ex-

2.0

6.9

2.0

Table 2.2 Average sectoral surpluses in fourteen developing countries, selected years

cess saving from economic units in surplus tothose in deficit.

Figure 2.1 shows the average saving and invest-ment rates for fourteen developing countries.Households saved 12.9 percent of GNP and in-vested 6.0 percent; that left them with a surplus of6.9 percent of GNP. Businesses saved 8.6 percentof GNP and invested 15.6 percent; that left themwith a deficit of 7.0 percent of GNP. The foreignsector was a net lender and the government a netborrower. The financial sector is the channel for allthese flows. Note that the country-by-country sec-toral balances which underlie these averages varywidely. Table 2.2 shows the balances for each ofthe countries that are aggregated in Figure 2.1. Thesurplus of the household sector, for instance,ranges from Côte d'Ivoire's 1.5 percent (in 1971-78) to Malaysia's 16.8 percent (in 1980-86).

Taking the fourteen countries together, Table 2.2shows that businesses financed 55 percent of theirinvestment from their own saving (in the form ofdepreciation allowances and retained earnings).Governments financed 72 percent of their invest-ment from their saving (that is, from the excess oftaxes and other income over consumption spend-ing plus transfers). And households as a groupfinanced all of their investment from their saving.Altogether, roughly half of all investment was self-financed.

An advantage of self-finance is that, in combin-ing the acts of saving and investing, it internalizes

Note: Sectoral surpluses may not sum to zero where figures have been derived from independent sources.a. A self-financing ratio is a sector's saving divided by its investment, expressed as a percentage. This ratio overstates true self-financing to theextent that there is intrasectoral borrowing or lending. Data are derived from the weighted sectoral saving and investment averages shown inFigure 2.1.Source: Honahan and Atiyas (background paper).

all the information, transaction, monitoring, andenforcement costs that would be involved if theresources were lent to someone else. No complexcontracts, collateral, or other devices are requiredto reduce the risks inherent in lending. The short-coming of self-finance is that an individual's in-vestment opportunities may not match his or herresources or may be inefficiently limited by them.

Even though the financial system intermediatesonly part of total investable resources, it plays avital role in allocating saving. In the early stages ofdevelopment, relatives, friends, and moneylend-ers may be the only sources of external finance. Asthe financial system grows, local banks, then na-tional financial institutions, and finally securitiesmarkets and foreign banks become sources offunds for investors. Smoothly functioning finan-cial systems lower the cost of transferring re-sources from savers to borrowers, which raises therate paid to savers and lowers the cost to borrow-ers (see Box 2.2). The ability of borrowers andlenders to compare interest rates across marketsimproves the allocation of resources.

Historically, the quality of investment has beenat least as important for growth as the quantity.Although the fastest-growing countries had higherrates of investment than the others in Table 2.1,empirical studies generally find that less than halfthe growth in output is attributable to increases inlabor and capital. Higher productivity explains therest. Higher labor productivity reflects better

29

(percentage of GNP)

Country and period Households Business Government Foreign

Cameroon, 1980-84 4.0 -9.4 2.7 2.8

China, 1982-86 7.0 -8.1 0.3 0.8Colombia, 1970-86 3.5 -4.6 -0.2 1.3Côte d'Ivoire, 1971-78 1.5 -7.7 1.3 4.4Ecuador, 1980-85 5.1 -6.8 -2.5 5.0India, 1970-82 5.5 -1.2 -5.5 1.1

Korea, Rep. of, 1980-85 7.0 -13.4 1.1 5.2Malaysia, 1980, 1985-86 16.8 -7.2 -12.2 1.7Philippines, 1983-85 9.1 -7.0 -3.6 2.9Portugal, 1977-79, 1981 14.3 -16.1 -7.3 7.6Thailand, 1981-83 6.8 -6.5 -4.3 5.7Tunisia, 1977, 1980-84 2.1 -13.7 2.5 9.1Turkey, 1971-81 7.7 -11.0 -0.9 3.2Yugoslavia, 1970-85 7.0 -8.2 0.7 1.2

Average (weighted) 6.9 -7.0 -1.9 2.0

Self-financing ratio' 215 55 72

Box 2.2 Transaction costs and the supply of credit

The impact of financial intermediation and interest rateceilings on credit can be demonstrated geometrically.In the diagrams in Box figure 2.2 the horizontal axismeasures the quantity of borrowing or lending per unitof time (X), and the vertical axis measures the cost ofborrowing (r) and the return for lending (1). The econ-omy's demand for credit is depicted in the first dia-gram by the downward-sloping curve labeled D. Itsnegative slope reflects, in part, the increasing quantity(per unit of time) of profitable investment as the cost ofborrowing declines. The upward-sloping curve labeledS depicts the economy's supply of credit, the amountof saving offered to others either directly or throughintermediaries such as banks. Its positive slope reflects,in part, the increasing share of total saving providedfor financial assets as their return rises relative to thereturn on real assets or investment abroad. If therewere no transaction costs or interest rate regulations,the market-determined rate of interest would be r =and the amount of credit per period would be X.

It is costly, however, for lenders to locate credit-worthy borrowers directly. In the center diagram, theamount lenders must charge borrowers to cover thatcost is reflected in the curve Sd. The vertical distancebetween this curve and the supply of funds curve (5) isthe amount of these transaction costs (including thecost of covering the expected defaults). If lenders hadto find borrowers on their own, they would be willing

Box figure 2.2 The supply of and demand for credit

r=I

r,i

r1,

x x,

to supply Xd in the expectation of earning (after deduct-ing expected costs) a. For that amount of credit bor-rowers would be paying r. Transaction costs introducea wedge between the cost to borrowers and the returnto lenders, which reduces the amount lent.

Banks or other intermediaries exist, in part, becausethey are able to reduce the transaction costs of borrow-ing and lending. This is reflected in the curve 5b Thewedge between the cost to borrowers and the return tolenders is now the banks' spread. Assuming that bankspreads are less than the costs of direct lending, theamount lent increases from Xd to Xb, the return tolenders increases from 1d to and the cost to borrowersfalls from ra to Tb. The better banks are at reducingtransaction costs, the greater these effects. Reducingtaxes on banking (such as unremunerated reserve re-quirements, which are a part of these costs) has thesame effect.

The third diagram shows the effect of an interest rateceiling (the horizontal orange line at ir). If the ceiling isapplied to deposit rates, it will reduce the amount lent(to X) and raise the cost to borrowers (to ic). If theceiling applies instead to lending rates, banks will setdeposit rates at i, deducting transaction costs. Theamount deposited (and lent, when abstracting from re-serve requirements) will be X. The excess demand forcredit (X, - X) cannot be satisfied, and lenders willration the available supply.

x x

1

health, skills, education, and work effort; highercapital productivity reflects technical progress andthe more efficient use of saving.

As more saving moves through the financial sys-

30

tern, financial depth increases. The financial sys-tems of higher-income countries are usuallydeeper (as measured by the ratio of liquid liabilitiesto GNP) than those in poorer ones (see Figure 2.2).

They are also deeper in the most rapidly growingcountries than in the slowest-growing countries(as shown by the ratio of M2 to GDP in Table 2.1).

Faster growth, more investment, and greater fi-nancial depth all come partly from higher saving.In its own right, however, greater financial depthalso contributes to growth by improving the pro-ductivity of investment. Investment productivity,as measured by the ratio of the change in GDP toinvestment (the inverse of the incremental capital-output ratio-ICOR), is significantly higher in thefaster-growing countries, which also have deeperfinancial systems (Table 2.1). This suggests a linkbetween financial development and growth. Howmight this work? It was noted above that positivereal interest rates favor financial saving over otherforms of saving and therefore promote financialdeepening. Provided that intermediaries are goodat selecting viable projects, greater intermediationwill ensure that the better investments are fi-nanced and will thereby increase the average pro-ductivity of investment. Table 2.3 groups the coun-tries of Table 2.1 that had meaningful interest ratedata according to their real interest rates: positive,moderately negative (0 to -5 percent), andstrongly negative. The first group had lower infla-tion rates, deeper financial sectors, moderatelyhigher investment rates, and significantly moreproductive investments than the others.

More important, the growth rates of the coun-tries with positive real interest rates were consider-ably higher on average than those of the others. Asthe world economy adjusted to the first oil priceshock of the early 1970s, productivity and growthfell nearly everywhere. But the fall was much

Figure 2.2 Indicators of financial depth

Percentage of GNP

80

60

40

20

0

Table 2.3 Growth rates and other economic indicators for country groups with positive, moderatelynegative, and strongly negative real interest rates, 1965 to 1973 and 1974 to 1985

Note: Real interest rates were calculated from nominal rates according to the following formula: 1(1 + r) 1(1 + p) - 11 x 100, where r is the depositrate and p is the inflation rate. Inflation is the percentage change in the consumer price index (CPI). M3 is currency plus the sum of nonbankdeposits of the public at all identified deposit-taking institutions. Real saving is gross domestic savings deflated by the average annual CPI rate.Volatility of inflation is the absolute deviation of the inflation rate from its level the year before.Source: Gelb (background paper).

31

(average percent)

1965-73 1974 -85

Negative NegativeIndicator Positive Moderately Strongly Positive Moderately Strongly

Real interest rate 3.7 -1.7 -13.7 3.0 -2.4 -13.0GDP growth rate 7.3 5.5 4.6 5.6 3.8 1.9M3/GDP 28.9 27.0 29.1 40.3 34.0 30.5Investment/GDP 21.4 19.7 21.4 26.9 23.2 23.0Change in GDP/investment 36.7 31.1 21.7 22.7 17.3 6.2Change in real M3/real saving 18.7 12.7 6.4 16.6 8.2 -0.9Inflation rate 22.2 7.1 40.2 20.8 23.9 50.3Volatility of inflation rate 17.1 5.3 27.2 12.2 9.1 23.5

Less than $450 to $3,000 to More than$450 $3,000 $7,200 $7,200

Per capita income

LI Liquid liabilities (M3)

Li Ml

[I] Currency

Note: Data are unweighted averages by income group. Ml is thesum of currency and demand deposits. Liquid liabilities are thesum of Ml, time and savings deposits, and other deposits atfinancial institutions.Source: Neal (background paper).

greater in the countries with negative real interestrates. Overall, output grew almost three timesfaster, on average, in the countries with positivereal interest rates than in the countries withstrongly negative rates. Further analysis suggeststhat positive real interest rates helped growthmainly by improving the quality of investment andnot just by increasing the quantity of investment(see Box 2.3). Although the rate of investment wasonly 17 percent higher in the countries with posi-tive real rates, the average productivity of their32

Box 2.3 Real interest rates and growth

Most developing countries have periodically held theirinterest rates below market-clearing levels. These artifi-cially low interest rates have "repressed" their finan-cial systems, shrinking financial assets in real termsespecially at times of high inflation. If financial depthpromotes economic growth, artificially low real interestrates may be an obstacle to development.

A background study for this Report estimated therelationship between real interest rates and growth forthe thirty-three developing countries with populationsof more than 1 million and acceptable data for the pe-riod 1965-85 (the same countries that are grouped byinterest rates in Table 2.3). When the data for thesecountries were averaged over each of two periods,1965-73 and 1974-85 (to take into account the markeddeterioration in growth of virtually all countries afterthe first oil shock), higher real rates of interest on short-term deposits were indeed associated with fastergrowth. In a simple regression where GY is the growthrate, R is the real interest rate, and SHIFT is the dummyfor the second period

GY = -0.12 + 0.20R + -0.02 SHIFT J2 = 0.45(-2.5) (5.2) (-3.4)

However, assessing the impact of interest rates oneconomic performance is not straightforward. Causa-tion could run in either direction. To analyze the associ-ation between interest rates and growth, this study de-composed the relationship into a chain of relationshipsmore likely to run in one direction. The hypothesizedchain ran from interest rates to financial depth and tosaving and from financial depth to the productivity ofinvestment.

The resulting estimates showed that higher real in-terest rates (obtained by raising repressed rates towardmodestly positive levels) are associated with increasedfinancial depth and with a modest increase in savingand investment. In the second link in the hypothesizedchain, financial depth was strongly associated withmore productive investment. When the estimates ofeach link are put together, they suggest that, althoughreal interest rates have a smaller effect on growth than

indicated in the simple regression, the association isstrong and appears to operate primarily through theeffect of greater financial depth on the productivity ofinvestment. (Note, however, that countries with re-pressed financial systems often suffer serious distor-tions in other sectors of the economy as well. Thestrong relationship between real interest rates andgrowth may therefore reflect the correlation betweenmacroeconomic imbalances and price distortions, par-ticularly the negative association between high infla-tion rates and growth, as well as financial repression.)

Box figure 2.3 plots some of the country data used inthis study. The value of each country's average invest-ment rate (horizontal axis) is plotted against its averagegrowth rate (vertical axis) for the second period (1974-85). Although higher investment rates are associatedon average with higher growth rates, the figure showsthat the relationship is loose. The differences betweengrowth rates and investment rates reflect differences inthe productivity of investment. Any line drawn fromthe origin represents a given growth-investment ratio(the inverse of the incremental capital-output ratio); ifall investments were equally productive, differences ingrowth rates would reflect differences in investmentrates only, and all points would fall on a line that repre-sents the average productivity of investment. In thefigure that linelabeled "average productivity ofinvestment' 'corresponds to the sample average.Thus the position of points with respect to the linereflects differences in the productivity of investmentamong the sample countries, with those above the linebeing more productive than the average and those be-low it less.

The blue squares depict countries with positive realinterest rates, the white squares those with moderatelynegative rates, and the red squares those with stronglynegative rates. Investments in all the countries withpositive real rates were more productive than average.Investments were generally less productive than aver-age in the countries with strongly negative real rates,four of which actually had negative growth rates overthe period.

investment was almost four times higher. Note,however, that many of the countries with positivereal interest rates also had more stable macroeco-nomic policies and more open trading systems,which should also raise growth rates.

Risks and costs of finance

Lending is risky. Intermediaries must cover thecosts of devising contracts that limit risk, of moni-toring and enforcing those contracts, and of losses.

Box figure 2.3 Real interest rates, investment, productivity, and growthin thirty-three developing countries in 1974-85

D Positive real interest rates

D Moderately negative real interest rates (0 to -5 percent)

Strongly negative real interest rates (less than -5 percent)

GDP growth rate (percent)9

Pakistan D IndonesiaflThailandSri Lanka

hidia EcuadorBrazil- J MexicoTurkey

TanzaniaSenegal\

Chile EI

Sierra Leone I

Average productivity of investment'

GhanaI-

a. Line represents sample average.Source: Geib (background paper).

0 Uruguay

Peru ZambiaArgentina

The extent of financial contracting depends on theextent to which cultural, legal, and institutional ar-rangements can reduce these costs. If they remainprohibitive, businesses will prefer to rely on self-finance.

Risks

Financial contracts involve credit risk, price risk,and liquidity risk. Credit risk is the danger that theborrower will default. Price risk is the risk of loss

\Côte d'Ivoir Malawi

Venezuela

Nigeria LI Zaire

UJamaica

LI Republic of Korea

Algeria 0Singapore 0

Malaysia

o Tunisia

O PortugalMorocco

ines

Yugoslavia

U

caused by unexpected changes in pricesin inter-est or exchange rates, for example. Liquidity risk isthe risk of being unable to sell financial assetsquickly, except at a steep discount. In addition,there is the risk that the default of one or a fewlarge borrowers will endanger the whole financialsystem. This is called systemic risk.

Informational asymmetries are one source ofcredit risk. Entrepreneurs have "inside" informa-tion about their own projects and creditworthi-ness. Lenders can reduce credit risk either by de-

33

0 5 10 15 20 25 30 - 35 40 45

Investment/GDP (percent)

Box 2.4 Swapping risk

All economic activities are subject to a wide variety oftechnical, economic, and financial risks. Many risks areamenable to actuarial calculations and can be coveredby straightforward insurance policies, but others arenot. Financial systems can help to overcome some risksby redistributing them among market participants.

Some types of risk can be limited through portfoliodiversification; other risks can be hedged by using anappropriate instrument, such as a forward contract oroption. The key to any hedge is to find a counterpartywilling and able to take the other side of the contract.Financial institutions have become adept at inventinghedging instruments and arranging hedging contractsbetween different parties.

One hedging instrument has become quite popularin the 1980s and has contributed greatly to the growingintegration of national financial markets. It is the"swap." Swaps involve the exchange of future streamsof payments between two or more parties and enablethe participants to convert debt servicing obligationsfrom one currency into another or from fixed to floatinginterest rates. Swaps exploit the segmentation of finan-cial markets that causes differences in the markets' per-ception of different borrowers. Thus, although a triple-

A-rated firm may be able to borrow in both dollars andyen at a lower rate than a B-rated firm, it may have acomparative advantage in borrowing in yen because ofits greater name recognition. Yet the second firm maydesire yen debt, perhaps because it exports to Japan. Acurrency swap allows both firms to borrow where theyhave a comparative advantage (thus reducing marketsegmentation), swap loans and repayment streams tomatch their desired risk profiles, and end up with alower cost of funds. The same principles are at workwhen a firm borrowing at fixed interest rates swapspayment streams with one borrowing at floating rates.

The importance of hedging devices is clearest whenthere are none. For example, in many developingcountries firmsincluding those with foreign currencyliabilitiesare prohibited from holding foreign cur-rency assets and cannot buy forward contracts; thislimits their ability to hedge their foreign exchange risk.Similarly, developing country farmers, who cannotparticipate in world futures markets, are unable tohedge the substantial risks associated with fluctuationsin the "world" prices of their crops. In these circum-stances producers are likely to invest less and produceless.

veloping their own expertise in the selection ofborrowers or by relying on information from insti-tutions such as credit rating agencies. Measuresthat increase the information available to lenders,such as the strengthening of accounting and audit-ing requirements, improve lenders' ability to iden-tify the borrowers with the best investment oppor-tunities. When information is poor, lenders candiscriminate between borrowers only in verybroad terms.

To cover risk, lenders raise the interest rate theycharge on loans. But this may be partially self-defeating, because the more creditworthy borrow-ers may choose not to borrow, which would leavethe lender with less creditworthy clients. (This isthe problem of adverse selection.) Furthermore, tocover the higher cost of borrowing, clients maytake on riskier projects. (This is the problem ofmoral hazard.) Because of their limited ability toidentify risks and monitor behavior, lenders tendto require collateral and to ration credit to the mostcreditworthy borrowers rather than to chargehigher interest rates on riskier loans. Borrowerswith little collateral are likely to be the most af-fected by credit rationing.

Financial risk can be reduced by improving the

34

availability and quality of information about bor-rowers (individuals, enterprises, or financial inter-mediaries), by improving the design and enforce-ment of loan contracts, and by enlarging the rangeof instruments so as to permit greater diversifica-tion of portfolios. Risk cannot usually be elimi-nated altogether, but the irreducible risk can oftenbe transferred to those more willing to bear it.Loan maturities, the choice of adjustable or fixedinterest rates, equity and venture capital arrange-ments, and collateral or cosigner requirements areall examples of different risk assignments. Muchrecent financial innovation has been driven by at-tempts to exploit comparative advantage in riskbearing (see Box 2.4).

Transaction costs

The services offered by financial institutions re-quire the collection and processing of a great dealof information and the design, monitoring, andenforcing of contracts. Providing these services isexpensive. Financial institutions must cover ad-ministrative costs (essentially payroll and rent),taxes, the cost of capital and of adhering to govern-ment regulations, and losses from default. They do

so by charging fees for specific services and inter-est on loans.

The burden of costs will shift between the partiesaccording to the arrangements adopted. Informalfinancial entrepreneurs rely on personal knowl-edge of borrowers; their information costs are low.In more advanced systems information and en-forcement become more expensive. In the earlystages of financial development, banks build thecost of gathering credit information into theirspreads. Later, firms supply more information ontheir own behalf. A corporation issuing bonds orequities must provide investors with informationabout itself. Firms send audited accounts to theirshareholders and to the tax authorities. They maypay a credit rating agency to grade their securities.

Transaction costs are also borne by depositors,investors, and government agencies. Depositorsincur costs in visiting bank branches and waitingin line to cash checks. Investors devote resourcesto analyzing information. Government agenciesusually bear some of the costs of monitoring andenforcement. A securities and exchange commis-sion may be called upon to certify the accuracy ofinformation provided in corporate prospectuses;deposit insurance corporations may assume re-sponsibility for monitoring deposit institutions.Government agencies generally cover their costsby levying fees on issued securities or collectingpremiums from insured institutions.

Spreads between borrowing and lending ratesand between buying and selling prices reflect theintermediary's costs, expected loan and tradinglosses, reserve requirements, and taxation. Com-mercial banks' spreads vary with the size and riskof loans. The average spread between lendingrates and the cost of funds in a high-income coun-try is between 2 and 3 percentage points. In nonin-flationary developing countries, spreads are simi-lar to those in industrial countries, but because therange of services offered may be more limited andoperating procedures more cumbersome, deposi-tors' and borrowers' combined transaction costsmay be higher. Spreads in inflationary countriescan be more than 10 percent, although that reflectsthe burden of high reserve requirements as well astransaction costs. Prime borrowers may be able toacquire funds through international markets for afee as low as one-tenth of 1 percent of the amountraised. Although spreads tend to be narrower indirect transactions than in intermediated ones, thedifference is partly offset by the additional costsborne by the principals.

High accounting standards and strong contract

enforcement help to reduce the risk of loss. Com-petition, however, is the most effective way tokeep transaction costs low. Access to a wide rangeof institutions and markets, including interna-tional markets, stimulates competition.

Government intervention

Governments intervene in the provision of finan-cial services for many reasons. Historically, theyhave controlled the means of payment, both toguarantee its soundness and to collect seigniorage.More recently, governments have tried to use theircontrol of money creation to influence the level ofeconomic activity and their control of the allocationand pricing of credit to influence the compositionof investment. (Chapter 4 discusses the recent ex-perience of the developing countries with policiesof this sort.) They have also intervened to ensurethat financial intermediaries behave prudently.

Fractional reserve banking systems (in whichbanks hold only partial reserves against liabilitiesand lend out the rest of their deposits) have suf-fered from occasional instability, excessive risk tak-ing, and fraud. The liabilities issued by banks inresponse to the demands of depositors are short-term, highly liquid, and supposedly low-risk.Loans, by contrast, are usually longer-term, lessliquid, and riskier. This difference is one reasonbanks charge borrowers more than they pay de-positors. But because banks are so highlyleveraged, relatively small losses on loans canleave them unable to honor their liabilities. Whenthe public suspects that a bank is insolvent, theresult is often a run on the bank, which sometimesspreads to other, solvent, banks. The drain of bankreserves causes a multiple contraction in bankcredit. When runs become widespread, as they oc-casionally did in the nineteenth and early twenti-eth centuries, financial panic can trigger a collapseof the credit-payment process and a sharprecession.

Governments have devised ways of dealing withbank runs. When they occurred, central banksacting as lenders of last resortprovided liquidityby rediscounting sound loans. In several high-income countries the government provided de-posit insurance. By guaranteeing the value and li-quidity of deposits up to a certain size, depositinsurance was designed to prevent runs from start-ing (see Box 2.5). The lender-of-last-resort facilitywas designed to prevent them from spreading.

Although prudential regulation has a differentrationale than economic regulation aimed at alter-

35

Box 2.5 Deposit insurance

Most high-income and a few developing countrieshave established deposit insurance schemes. Depositinsurance guarantees the nominal value and liquidityof deposits up to a certain size. The insurer is an insti-tution, generally government-owned, established forthat purpose, and funded with premiums paid by theinstitutions whose deposits are insured. Deposit insur-ance can help to establish confidence in the safety ofsaving with banks (or other covered institutions) incountries with limited banking habits. The principaltargets of deposit insurance are small, unsophisticateddepositors who are least able to assess the soundnessof a particular depository. By assuring depositors thattheir money is safe even if the depository is not, de-posit insurance supplements the central bank's lender-of-last-resort role in forestalling bank runs.

Like all insurance, deposit insurance suffers from therisk of moral hazard. Because insured depositors nolonger need to be concerned about the quality of theirdepository's assets, market regulation of bank behav-ior is reduced. A considerable degree of market regula-tion can be retained if deposit insurance coverage islimited to relatively small deposits. The interbank de-posit market, which has become an important source ofshort-term liquidity for all advanced banking systems,can impose a significant measure of discipline on banks

and should never be insured. This contrasts with thesavings and loan associations in the United States,which, in addition to having insure deposits, do mostof their short-term borrowing from the Federal HomeLoan Bank System, which lends according to less de-manding standards (see Box 5.4 in Chapter 5). An ines-capable fact of deposit insurance is that it places greaterresponsibility on government to see to it that insuredinstitutions behave prudently.

With or without insurance, depositors would be fullyprotected if banks were closed and liquidated the mo-ment their capital fell to zero. This is not a practicalpossibility: the condition of a bank cannot be known toinspectors minute by minute and, because liquidationtakes time, asset values can decline before liquidationcan be completed. However, up-to-date market ac-counting, frequent inspection, and swift action by in-spectors to close insolvent banks are clearly importantin minimizing losses. In some countries the laws estab-lishing deposit insurance provide the mechanisms forexactly such steps. Furthermore, the enhanced super-visory capability that sometimes accompanies the es-tablishment of deposit insurance can and should beused to spot problems in bank management and inbanks' portfolios well before insolvency occurs and tocompel banks to take corrective action.

ing the allocation of resources, it too affects thestructure and efficiency of the financial sector. Forexample, many governments have honored the lia-bilities of insolvent financial institutions evenwhen there was no formal insurance. Governmentguarantees and lender-of-last-resort facilities,however, changed the behavior of both depositorsand bankers. Depositors and other buyers of bankliabilities that were either explicitly or implicitly in-sured no longer had to monitor banks to protectthe value of their deposits. Bankers no longer hadto worry about runs, so they could make riskierloans. Governments therefore had to regulate andsupervise the system.

Deposit insurance, coupled with regulation andsupervision, has reduced the problem of bank runsbut has been less successful in preventing fraudand excessive risk taking by banks, as the presentwidespread insolvency among the financial institu-tions of the developing countries makes clear (seeChapter 5). And high-income countries have notbeen exempt (see Box 5.4). It is often argued thatgovernment supervision is not an efficient substi-tute for market supervisionin the form, for exam-

36

pie, of monitoring and control of bank managersby stockholders and depositors. Innovative finan-cial entrepreneurs have often been able to evadethe rules; those intent on deceiving bank exam-iners have often succeeded in hiding losses forsome time.

Many countries have therefore moved in recentyears to strengthen the role of the private sector inmonitoring and controlling financial enterprises.Some have set higher capital requirements for fi-nancial institutions. This ensures that the ownershave an adequate stake in the efficiency withwhich depositors' resources are used. Similarly,stringent audit and reporting requirements makean institution's financial condition visible to depos-itors and investors. And yet some governmentshave also covered losses that in the past wouldhave been borne by market participants. This runscounter to the principle of allowing market signalsa greater role in supervising the system.

The task of balancing efficiency, which requiresfreedom to act, and stability, which evidently re-quires a degree of government regulation, is ex-tremely difficult. Some theorists argue for an un-

compromising market-based approach, but inpractice all governments have chosen some formof supervision. If markets are to judge, price, andallocate risk correctly, governments must clearlydefine the areas in which they have takenresponsibilityand allow losses to be incurred inthose that are not insured. (Chapter 6 discussesprudential regulation in more detail.)

The structure of the financial system

The financial system consists of many institutions,instruments, and markets. Financial institutionsrange from pawnshops and moneylenders tobanks, pension funds, insurance companies, bro-kerage houses, investment trusts, and stock ex-changes. Financial instruments range from thecommoncoins, currency notes, and checks;mortgages, corporate bills, bonds, and stockstothe more exoticfutures and swaps of high fi-nance. Markets for these instruments may be orga-nized formally (as in stock or bond exchanges withcentralized trading floors) or informally (as in over-the-counter or curb markets). For analytical pur-poses, the system can be divided into users of fi-nancial services and providers.

Users of financial services

Financial institutions sell their services to house-holds, businesses, and government. The bound-aries between these sectors are not alwaysclear-cut.

HOUSEHOLDS. The household sector includessmall, mainly unregulated firms and individualsTheir main financial needs are for payment ser-vices, for liquid assets in which to save, and forrelatively small amounts of credit. They seek con-venience (nearby branches, for example), simplic-ity, liquidity, and security.

After making their own investments, house-holds as a group have surplus resources to lend(Figure 2.1). Hence, they demand convenient as-sets to hold. This demand, as well as the demandfor a medium of exchange, may be met by cur-rency. To a lesser extent it may be met by bankdeposits, although hoarding commodities or par-ticipating in informal saving arrangements are al-ternatives. Accumulated investment in housingis a large part of the nonhiquid wealth of house-holds at all but the poorest income levels. Asincomes rise, insurance and contractual savingsschemes (life insurance and pensions) also becomeimportant.

Households also need credit. Street vendors, forexample, need short-term finance to purchasedaily stocks. Small farmers need seasonal ormedium-term credit to buy capital. Would-behomeowners need long-term mortgage financing.Households are often unable to convince financialinstitutions that they are creditworthy. So theyturn to lenders who do not require formal businessrecords or collateralto family and friends or tolocal pawnbrokers and moneylenders. (Chapter 8examines informal finance in greater detail.)

BUSINESSES. Wealthier households and corpora-tions have more complicated financial needs. Theyrequire check and wire transfer payments; de-posits in larger amounts and at longer maturities;letters of credit; guarantees; purchase and sale offoreign exchange; underwriting; advice on finan-cial, accounting, and tax matters; and so forth. Thebusiness sector is invariably a net borrower; itneeds short-term credit to finance inventories andlong-term funds to finance capital expansion. Nev-ertheless, it also holds a substantial share of grossfinancial assets. For example, in 1984, businessesheld 48, 49, and 64 percent of demand deposits inKorea, Malaysia, and Tunisia respectively.

The business sector includes public as well asprivate enterprises. Public enterprises are gener-ally in capital-intensive industries such as utilitiesand transportation. In developing countries manyof the larger manufacturing firms are publiclyowned as well. Many public enterprises have beenrun not to generate profit but to provide employ-ment and to supply goods and services at reason-able prices. Because many have incurred losses,they have been unable to finance their investmentfrom retained earnings. Public enterprises havebeen heavy borrowers in both domestic and for-eign markets. Their losses have been a drain onnational saving.

Some of the largest corporations can meet most oftheir demand for financial services by themselvesand may even be able to supply financial services toothers: trade credits to their customers, for instance.They can also tap financial markets directly by issu-ing their own financial instruments (commercial pa-per, bonds, equity securities, and so on). Yet directfinancing has been negligible in most developingcountries and unimportant in most high-incomeones. In France, Italy, Japan, and the United King-dom, for example, stocks and bonds financed an av-erage of less than 9 percent of corporate investment;30 percent of it was financed with bank loans and therest from internally generated funds.

37

GOVERNMENT. As well as being regulators oftheir financial systems, governments are amongtheir clients. All governments use payment ser-vices. In most developing countries, governments,like businesses, are net borrowers, and they usethe financial system as a source of funding for cur-rent and capital spending. In industrial countries,government deficits are financed mainly by sellingsecurities to the public. In developing countriesthey are usually financed by borrowing frombanks. In Sierra Leone, Zaire, and Zambia, for ex-ample, more than 70 percent of bank credit hasgone to the government in recent years, and inMexico 55 percent. Much of that credit was sup-plied by the central banks, which thereby in-creased the stocks of reserve money in these coun-tries. The inflation caused by excessive monetarygrowth has greatly retarded the development ofthe financial sector in developing countries, espe-cially since interest rates have often been helddown.

Governments have also used the financial sys-

tem to serve development or other goals. Theyhave directed credit, often at subsidized interestrates, to priority sectors. Many developing countrygovernments own banks or other financial institu-tions and thus play a direct role in allocating re-sources. Monetary policy is conducted through thefinancial sector (see Box 2.6). The influence of gov-ernments on the amount and pattern of invest-ment has therefore been much greater than theirown investment spending would suggest.

Providers of financial services

Financial systems differ from country to country,yet there are many similarities. In addition to thecentral bank, most countries have five main classesof financial institution: deposit and credit institu-tions, contractual savings institutions, collectiveinvestment institutions, securities markets, and in-formal financial enterprises. (Chapters 7 and 8 dis-cuss the services provided by these parts of thefinancial system in more detail.) Casualty insur-

Box 2.6 Monetary policy

Governments intervene in finance partly to control thesupply of money and credit. When the budget deficit islarge, governments often cover it by creating money.Excessive creation of money to cover budget deficits isthe most common cause of inflation. When the fiscaldeficit is not a consideration, the objective of monetaryand credit policy is usually to maintain stable prices.

Governments have various tools to control the mone-tary aggregates. Perhaps the most common techniquein developing countries is for the central bank to spec-ify credit ceilings for each commercial bank. Such ceil-ings have been criticized because they discourage com-petition and the mobilization of deposits.

Another approach is for the central bank to fix theamount of deposit liabilities that can be created by thebanking sector by imposing reserve requirements andcontrolling the quantity of reserves available to banks.Central banks often control the level of reservesthrough the refinancing facilities they provide to com-mercial banks. But if refinancing is used to channelcredit to preferred sectors, it cannot easily be used formonetary control as well. Other countries use themovement of government deposits between commer-cial banks and the central bank to control the level ofreserves. In countries with more developed financialsystems, central banks adjust bank reserves, and hencethe money supply, through the purchase or sale of gov-ernment securities. These transactions are called open

market operations. When the central bank buys a secu-rity, it pays with a check drawn on itself, thereby in-creasing its liabilities. Open market operations cannotbe used in a system without an established govern-ment bill market. Monetary control with open marketoperations leaves the allocation of credit to marketforces.

The degree of integration with world financial andcapital markets also affects the execution of monetarypolicy. An open and fully integrated economy thatchooses to maintain fixed exchange rates would haveto maintain the money supply at the level demanded atthe "world" price level and interest rate. Any otherquantity of money would result in changes in the for-eign exchange reserves of the central bank. The centralbank's purchase or sale of foreign exchange would re-place open market operations as the tool for determin-ing bank reserves and, hence, the money supply.

A fixed exchange rate constrains the central bank'sability to create money and is thus a potential source ofmonetary discipline. A market-determined exchangerate restores a measure of domestic monetary indepen-dence. With either fixed or floating exchange rates,central banks will need to set reserve requirements atlevels comparable to those in other countries if bankingbusiness is not to be driven abroad. Noninterest-earning reserve requirements are a tax on banks and assuch will affect their competitiveness.

38

Table 2.4 The institutional structure of selected financial systems, 1985

ance companies are also generally considered partof the financial sector, but they are not discussed inthis Report.

Table 2.4 compares the structure of the financialsector in high-income countries with its structurein some of the more advanced developing coun-tries. Banks in developing countries hold a biggershare of all financial assets (48 percent) than theydo in industrial countries (37 percent). The tableunderstates this dominance, because the develop-ing countries included are those with the most so-phisticated financial systems. When central banksare included, the predominance of the bankingsectors of most developing countries is evengreater, for the central banks in the sample hold 20percent of the financial sector's assets in develop-ing countries compared with only 3 percent in de-veloped markets. In addition to issuing currencyand overseeing the operation of the payment sys-tem, the central bank acts as banker to the govern-ment and to other banks. In contrast, nonbank in-

Note: Total financial system assets are the assets of all the institutions shown in this table plus the stock of outstanding securities and equities. Toeliminate double-counting caused by the assets of one institution being the liabilities of another, net financial assets have been approximated bythe sum of total liquid liabilities (IFS, line 551) plus securities and equities. To deflate these stocks by the flow of GNP, five-quarter arithmeticaverages are constructed from year-end data for 1984 and 1985, assuming constant exponential growth during the year.a. The sum of government bonds, corporate bonds, and corporate equity.Source: IMF, International Financial Statistics, and World Bank data.

termediaries and contractual savings institutionshold a much larger share of financial assets in high-income countries than they do in developing ones.The relatively small domestic financial sectors ofthe developing countries stand in sharp contrast totheir relatively large reliance on foreign financing.

Different financial institutions provide servicesthat are both complementary to and competitivewith each other. Deposit institutions offer paymentand liquid deposit facilities, and contractual sav-ings institutions provide ihiquid savings opportu-nities that cater to the longer-term needs of cus-tomers. Collective investment institutions offersmall investors the benefits of professional man-agement and low-cost risk diversification, encour-aging them to diversify their savings into market-able securities. On the lending side, commercialbanks have traditionally provided working capitaland trade finance, but longer-term lending is gain-ing with the spread of universal banking. Factor-ing companies specialize in financing inventories

39

Country

Assets as a percentage of total gross assets of the financial system As a percentage of GNP

Centralbanks

Depositbanks

Specializedlending

institutions

Contractualsavings

institutions

Collectiveinvestmentinstitutions

Long-term debtsecurities

and equities'

Netfinancial

assets

Totalexternal

debt

Developed marketsAustralia 5 31 14 17 1 33Canada I 33 2 26 8 30 165

France 6 56 10 7 5 16 109

Germany, Fed. Rep. of 4 41 14 9 2 30 158

Japan 2 45 9 6 7 30 300

Sweden 4 27 18 16 1 35United Kingdom 1 35 1 26 3 34 188

United States 2 28 7 19 4 40 210

Average 3 37 9 16 4 31 188 -Emerging markets

Argentina 32 43 11 5 0 10 80

Brazil 27 32 12 2 4 23 59 50

Chile 14 44 1 11 1 28 75 145

India 10 47 6 12 1 24 65 19

Korea, Rep. of 9 53 14 4 10 10 66 57

Malaysia 7 34 12 13 3 32 247 52

Nigeria 23 46 2 3 7 19 49 26Pakistan 21 65 1 2 1 11 45 39

Philippines 30 38 14 3 3 14 38 82Portugal 20 72 1 2 1 4 124 85

Thailand 16 55 12 1 0 17 89 47

Turkey 33 54 4 6 0 3 27 50

Venezuela 20 46 25 1 0 8 65 74

Average 20 48 9 5 2 16 79 62

and receivables, whereas development banks andleasing companies provide long-term investmentfinance.

Money and capital markets provide investmentinstruments appropriate for contractual savingsand collective investment institutions, whose ser-vices to the saving public are thereby improved.The efficient functioning of financial markets alsodepends on institutions that lend and borrow littleon their own account: investment banks, securitiesbrokers, and credit rating agencies. Commercialbanks also improve the working of financial mar-kets by providing credit and payment facilities tomarket makers and other market participants.

Different financial institutions and markets com-pete for a limited pooi of savings by offering differ-ent instruments. Money and capital markets in-crease competition between suppliers. Moneymarkets give merchant banks, or commercialbanks with limited branch networks, greater ac-cess to funds. Because such banks specialize inlending to larger corporations, the corporate loanmarket may be highly competitive, even though afew large domestic banks may continue to domi-nate the retail deposit market.

Money markets also provide large corporationsand nonbank financial institutions with efficientshort-term instruments for investing their liquidfunds and thus compete directly with commercialbanks' traditional deposit facilities. They also en-able large corporations to issue short-term securi-

40

ties in the form of commercial paper and thus fur-ther reduce the market power that large banks mayhave in the domestic banking sector. Finally, capi-tal markets enable contractual savings and collec-tive investment institutions to play a more activerole in the financial system.

The complementary and competitive interactionof financial institutions has policy implications. Topromote an efficient financial system there must becompetition, but the system must also offer an ar-ray of services. Rather than restrict the growth anddiversification of the main banking groups, gov-ernments in the larger economies would be wise topromote greater competition by encouragingmoney and capital markets, specialized credit in-stitutions (such as leasing and factoring compa-nies), and contractual savings and collective in-vestment institutions. Economies too small tosupport such specialized institutions can spurcompetition by allowing economic agents to buyfinancial services abroad.

The financial systems of many developing coun-tries are inadequate, or less efficient than theycould be, or both. Efficient financial systems helpcountries to grow, partly by mobilizing additionalfinancial resources and partly by allocating thoseresources to the best uses. As economies develop,so must the financial systems that serve them. Thenext chapter illustrates the central role of finance indevelopment by reviewing the evolution of finan-cial systems since preindustrial times.

The evolution of financial systems

In preindustrial economies, finance was largelyconcerned with the development of a medium ofexchange. Barter was inefficient, transaction costswere high, and the lack of a medium of exchangelimited the extent of the market and the opportuni-ties for specialization. With the growth of nonlocaltrade, the development of payment media becamelinked to the financing of trade. Otherwise, apartfrom the financing of governments and seabornetrade, borrowing and lending were mostly infor-mal and on a small scale.

The spread of urban society, and above all theadvent of large-scale industrialization in the sec-ond half of the nineteenth century, altered the rolethat finance had to play. Finance was now con-cerned with mobilizing resources for large infra-structure projects and for investments with heavycapital requirements that exceeded the capabilitiesof small family firms.

The systems that emerged often suffered fromfraud and mismanagement. They proved unstableand experienced frequent crises. Speculative ma-nias, fueled by financial institutions, causedmounting concern, and after the Great Depressionof the 1930s governments began to supervise theirfinancial systems more closely. But government in-tervention was by no means entirely successful. Itmade the financial system less flexible, and al-though it reduced fraud it did not eliminate it.Moreover, economic agents proved adept at get-

ting around the regulations. In recent years thefocus has shifted back to deregulation, partly inresponse to financial innovation and partly to pro-mote competition and efficiency.

The evolution of financial systems ought to castlight on two questions that are of interest to policy-makers in developing countries. What role shouldfinancial systems play in promoting industrializa-tion and development? And what role should gov-ernments play in creating such systems?

Development of payment systems

The search for an efficient medium of exchangegradually led to the monetization of preciousmetals. As a result the payment mechanism be-came simpler and safer. The new monies facilitatedtrade and provided a store of value and a unit ofaccount. Governments played an important part inthis change by owning and regulating mints andthus ensuring the quality and acceptability ofcoins. But they were also frequently responsiblefor debasing coins by lowering their weight oradulterating them with less precious metals, suchas copper.

Metallic payment was a big step forward. Gradu-ally, however, paper-based instruments, whichwere cheaper and more convenient, came to re-place coins and bullion. Payment orders, letters ofcredit, and negotiable bills of exchange evolved

41

with the expansion of nonlocal trade in Europe.These were particularly useful in triangular trade,because only net settlements had to be made inspecie. Commercial bills known as hundi weredeveloped in India. In Japan, the need for cashwas reduced by the use of bills and rice warehousewarrants and by the development of clearingfacilities.

The direct role of governments in creating paper-based credit instruments was limitedalthoughthey provided the legal framework that was neces-sary for their use. Governments played a greaterpart in the development of paper money. Theywere involved either directly (as in China) or indi-rectly (which was more common), through grant-ing the right to issue paper money to private bank-ers. China invented paper money in the ninthcentury. The ruler, acutely aware of the problemsof paper money, enforced acceptance with thethreat of death and by strictly limiting issuance(see Box 3.1), although there were many later in-stances of overissue. Paper money was subse-

Box 3.1 Marco Polo discoverspaper money

"In this city of Kanbalu [Beijingi is the mint of theGreat Khan, who may truly be said to possessthe secret of the alchemists, as he has the art ofproducing money . . . He causes the bark to bestripped from . . mulberry-trees . . . This . . . ismade into paper, resembling, in substance, thatwhich is manufactured from cotton, but quiteblack. When ready for use, he has it cut intopieces of money of different sizes, nearly square,but somewhat longer than they are wide . . . Thecoinage of this paper money is authenticated withas much form and ceremony as if it were actuallyof pure gold or silver; for to each note a number ofofficers, specially appointed, not only subscribetheir names, but affix their seals also . . . The act ofcounterfeiting it is punished as a capital offence.When thus coined in large quantities, this papercurrency is circulated in every part of the GreatKhan's dominions; nor dares any person at theperil of his life, refuse to accept it in payment. Allhis subjects receive it without hesitation, because,wherever their business may call them, they candispose of it again in the purchase of merchandisethey may require; such as pearls, jewels, gold, orsilver. With it, in short, every article may be pro-cured."

Marco PoloThe Travels of Marco Polo, Book II, Chapter 24

(Komroff 1926, pp. 156-57)

42

quently introduced in Japan. In Europe, banknotes (representing promises to pay on demand)were issued in the seventeenth century by gold-smiths, notaries, and merchants, who graduallydeveloped into bankers. Banks created by specialcharter, such as the Bank of England, also issuednotes. In the colonies of North America, a chronicshortage of bullion led to the issue of land-backedcertificates, which circulated as paper money.

The overissue of bank notes often underminedthe credibility of paper money and led to financialcrises and the suspension of the notes' convertibil-ity into bullion. This happened in the AmericanCarolinas and France in the eighteenth century,and in several European and Latin American coun-tries in the nineteenth century. Attempts in thenineteenth century to regulate the supply of gold-backed bank notes in England stimulated the useof checks drawn on bank deposits to make pay-ments and thus promoted the spread of a moreefficient and versatile instrument of payment. Thegrowing use of bank notes issued by differentbankers led to the creation of clearing facilities,which were later extended to cover the clearing ofchecks.

As central banks evolved to cope with the recur-ring financial crises of the latter part of the nine-teenth century, they came to monopolize the noteissue. This led to the eventual adoption of fiatmoneythat is, paper (and later credit) money notbacked by bullion. Fiat money solved the problemof loss of confidence in bank notes issued by indi-vidual banks, but not the problem of overissue ofpaper money by the central bank. Many countriesin Asia, Europe, and Latin America suffered epi-sodes of hyperinflation after governments hadused the central bank's printing presses to financetheir deficits.

The twentieth century has seen further innova-tion in payment instruments, including plasticcards and electronic transfers. These were devel-oped primarily to improve the efficiency of pay-ments rather than to promote expansion of trade.In most countries, central banks now play an im-portant role in the payment system: they provideclearing and settlement facilities to banks and toother institutions that offer payment services.

Development of trade finance

In preindustrial economies, governments bor-rowed to pay for wars, and seaborne trade wasfinanced, as it had been since classical times, by so-called bottomry loans (a combination of loan and

Box 3.2 Trade financing in Renaissance Italy

The businessmen and bankers of northern Italy's Re-naissance city-statesparticularly Genoa, Florence,and Venicedeveloped many of the fundamental prac-tices of modern finance. Their innovations includeddouble-entry bookkeeping and the provision of creditthrough discounted promissory notes. One of theirmost important innovations, however, was tradecredit.

Suppose that a Florentine textile manufacturer re-ceived a potentially profitable order from Barcelonaand had the means to fill it. Two things might keep himfrom accepting the business. First, the importer mightnot pay until he received the goodsperhaps not evenuntil he had sold them. Meanwhile, the exporterwould have to pay for materials, labor, storage, andshipment. Second, having produced and shipped hisgoods, the exporter would have to bear the risk that theimporter might simply fail to pay. And there was nocourt to which the exporter could take the Barcelonamerchant.

Commercial banksthat is, banks which specialize infinancing commercecame into being to solve suchproblems. By providing short-term finance (workingcapital), commercial banks enabled such merchants topay for materials and labor in advance. They solved thesecond problem by having trusted agents in major cit-

ies. For a fee, the bank could pay the exporter as soonas the shipment embarked. The importer would thenpay the bank's agentadding a feewhen the ship-ment arrived. For an additional fee the same bankmight even insure the shipment.

Over time, the Italian banks developed this vitaltrade-financing function. The leading Florentine bank-ing family, the Medici, acquired agents or correspon-dents in Europe's trading cities and made itself indis-pensable in the continent's commerce. Probably in thethirteenth or fourteenth century, the bankers inventeda variation that limited the degree to which their owncapital was tied up over the course of the transaction.This was the "acceptance," or "four-name paper."The Barcelona agent (name 1) would sign a document"accepting" the liability of the importer (name 2) to theexporter (name 3), and the document would be con-veyed to the banker in Florence (name 4). The bankerwould disburse (after subtracting a discount) to the ex-porter against this acceptance. The banker could thensell the acceptance at a discount in the Florentine finan-cial market and thus replace most or all of the cash thebank had disbursed. After some weeks the importerwould pay the agent, the agent would pay the bank,and the bank would repurchase the acceptance, con-cluding the operation.

I

insurance contract, which was repayable upon thesafe completion of the voyage). Otherwise, bor-rowing and lending were mostly on a small scaleand were limited to trade credit, short-term loansto farmers, and loans for nonbusiness purposes.The financial system comprised money changersand moneylenders and a few private bankers whodealt mostly with wealthy individuals, acceptingdeposits for safekeeping and providing loans. Inaddition, tax farmers helped to administer the taxsystem by collecting and transferring taxes, andvarious religious establishments offered their ser-vices as safekeepers.

The expansion of commerce was driven by thespread of trade fairs from medieval times and byadvances in maritime technology in the fifteenthcentury. It led to the accumulation of large per-sonal fortunes in Europe. Deposit banking andgeneral and maritime insurance evolved to meetthe growing needs of merchants and wealthy indi-viduals. The creation of trading companies withspecial charters and limited liability gave rise to theissue and informal trading of company securities.The pace of financial development differed fromcountry to country; the city-states of northern

Italy, for instance, made significant advances intrade finance (see Box 3.2).

Apart from granting charters to trading compa-nies and note-issuing banks, governments pro-moted financial development indirectly, throughthe preservation of peace or the waging of warsand through their success or failure in maintainingmacroeconomic stability. War finance was the spurfor many of the innovations of this periodthecreation of the Bank of England and other char-tered banks, for example, and the issue of govern-ment bonds.

Urbanization and the capital requirements of in-frastructure projects toward the end of the eigh-teenth century created a need to mobilize new fi-nancial resources. But the onset of the IndustrialRevolution had relatively little impact on finance:the capital requirements of early industrial enter-prises were small. Many owners came from pros-perous trading or artisan families that were diver-sifying into manufacturing; such owners providedmost of the capital from their own resources. Fami-lies, friends, and wealthy private investors pro-vided the balance. Banks supplied mainly short-term working capital, which was routinely rolled

43

over. Even so, bankers and industrialists (foundryowners, brewers, textile manufacturers, and so on)developed close relationships, mainly throughcross partnerships.

The impact of large-scale industrialization

Financial development accelerated with the expan-sion of the railways and, especially, with the ad-vent of large-scale industrialization in the secondhalf of the nineteenth century. Advances in me-chanical and electrical engineering and the increas-ing scale of production of electricity and chemicalsmeant that industrial enterprises needed morecapital. This required a big change in industrialfinance.

The possibility of incorporating joint-stock com-panies with limited liability made it easier for en-terprises to attract the capital they needed to grow.Stock exchanges evolved to facilitate the issue andtrading of debentures and shares. Banks and in-surance companies expanded their operations.Several new types of institution were formed, in-cluding occupational pension funds and invest-ment companies, although these were small to be-gin with. Savings banks, credit cooperatives, andfarmer banks, mortgage banks, building societies,and savings and loan associations began to meetthe financial needs of farmers, traders, savers, andhomeowners, all of whom had been neglected bythe commercial banks. Most of the financial insti-tutions that we are familiar with today appearedbefore the end of the past century.

Different institutional structures and financialpractices emerged among the industrializing coun-tries. These have had a pervasive impact on thefunctioning of financial systems and have givenrise to a persistent debate about the role of finan-cial systems in promoting industrialization andeconomic development. But except in the UnitedStates, where chartering provisions prohibited in-terstate banking and prevented the emergence ofnationwide banking, governments' involvementin shaping the organization of financial systemswas limited to changing the legal framework toallow the creation of joint-stock banks and nonfi-nancial corporations and enacting subsequent reg-ulatory changes to govern the operations of largecorporations (see Chapter 6).

In Germany, several other continental Europeancountries, and Japan, the banking sector becamean important source of finance for industry. Banksoperated as "universal" banks, engaging in bothcommercial and investment banking: they ac-

44

cepted deposits, made long-term loans, issued andunderwrote corporate securities, and took equitypositions in industry. Universal banking first ap-peared in Belgium and France, but it was moresuccessful in Germany and Switzerland, where itsintroduction coincided with the expansion of tech-nologically advanced industries. In these coun-tries, the leading commercial banks developedclose links with industry and played a crucial rolein raising long-term industrial finance and promot-ing industrial concentration and efficiency.

In Japan, major legal and regulatory reformswere implemented after the Meiji Restoration in1868. The aim was to modernize Japan's economyand promote industrialization. Traditional tradinghouses, such as Mitsui and Sumitomo, were ableto develop into large banks alongside newly estab-lished banking groups. The emergence of zaibatsugroupsfamily-based conglomerates with wide-ranging interests in industry, commerce, banking,and financespeeded economic development. Ini-tially, leading banks within zaibatsu groups pro-vided long-term finance to their partner enter-prises and only short-term credit to others. Lateron, as the zaibatsu firms became more self-sufficient financially, their banks provided long-term finance to other enterprises and in effect be-came universal banks like those in Germany.

In Britain, the preference of the big joint-stockbanks for short-term self-liquidating investmentslimited their provision of long-term finance for in-dustry. A relatively high concentration of privatewealth fueled equity and bond finance, initiallythrough informal channels but later through orga-nized securities markets. But weaknesses in theBritish securities markets (and especially the use ofmisleading prospectuses by undercapitalized andoften unscrupulous company promoters) under-mined investors' confidence in new industriessuch as electricity and chemicals. This delayedlarge-scale industrialization. Traditional industriesthat could finance their investment from internalfunds continued to prosper, however.

As noted above, chartering restrictions pre-vented commercial banks from developing into na-tionwide institutions in the United States. As aresult, the New York Stock Exchange became asubstantial source of finance for industry. The re-payment of the federal debt after the AmericanCivil War and the accumulation of bank balancesand trust funds in New York increased the supplyof investment funds. Private banks, which wereallowed to operate as universal banks, maintainedconsiderable influence well into the twentieth cen-

tury. They assisted in the formation of America'sbig industrial groups, as did the large New Yorkjoint-stock banks and the trust and life insurancecompanies. Until at least the turn of the century,leading American commercial banks operatedmore like German universal banks than British de-posit banks, and their relations with industry weremuch closer than in Britain.

Stock exchanges developed from informal trad-ing in the shares and debentures of chartered trad-ing companies, which appeared in Britain, theNetherlands, and other countries in the sixteenthand seventeenth centuries. By the middle of thenineteenth century, stock exchanges were domi-nated by domestic and foreign government bondsand, to a lesser extent, by the bonds and shares ofrailway and other public utilities. The securities ofindustrial companies were relatively unimportant,except on the New York Stock Exchange. How-ever, all the major countries had informal sourcesof equity and long-term debt finance for industry.Stock exchanges became a more important sourceof industrial finance as industry's capital require-ments grew in the second half of the nineteenthcentury.

At the turn of the century, bond and equity mar-kets were already well developed in Britain and theUnited States. But much like the present situationin most developing countries, the financial sys-tems of the big industrial economies were domi-nated by commercial banks (see Figure 3.1). Insur-ance companies and other institutions accountedfor only small shares of total financial assets.

Financial crises

In preindustrial economies financial crises wereusually caused by war, natural disaster, or the de-basement of the currencyalthough in the fewcenturies before the Industrial Revolution, the fail-ure of private or state-chartered banks had some-times precipitated wider financial instability. Withthe growth of banking and the expansion of securi-ties markets in the nineteenth century, however, asystem's stability began to depend on the sound-ness of its institutions. Ways therefore had to befound to provide liquidity to institutions in dis-tress. Bigger and more complicated loans, ex-tended over longer maturities, increased the risksof default and fraud on both sides. This underlinedthe need for prudential regulation and for laws tomake financial contracts easily enforceable.

Financial crises often began as speculative ma-nias, linked as a rule to foreign conquest; discov-

Figure 3.1 The evolution of financial assetsin selected countries, 1800 to 1987

1800 1840 1880 1920 1960 1987

Note: There are some differences in definitions and coverageacross countries.

Deposits with banks and other institutions.Data refer to both listed and unlisted companies.Accumulated reserves with insurance companies and pension

funds.Source: For 1800-1965: Goldsmith 1985; for 1965-87: central bankreports.

45

Percentage

250

of GNP IndustrialCountries

Deposits' Germany200

Great Britain150

Japan100 Ai1i' "P, United States

50

0

Developing25o countries

Corporate equityb India

200

Mexico150

100

50 AIR0

250

Insurance and pension reservesc200

150

100

50

0

Swindles have taken many forms, from chain letters towildcat banking, from penny stock scandals to insidertrading. A typical swindle is the Ponzi scheme. It takesits name from Carlo Ponzi, a Bostonian of the 1920s.His idea was to lure investors by promising very highreturns on the basis of a plausible but fictitious plan.He used the capital provided by latecomers to pay ear-her investors. The scheme collapsed when the inflowof new money was inadequate to cover the outflow.

Few swindles are pure Poozi schemes. Most mix gen-uine investment with insider trading. An early exam-ple of insider trading was the South Sea Bubble of1720. John Bull and other managers of the South SeaCompany borrowed from the company to buy itsshares. As share prices rose, they made excellentprofits. But to prevent the bubble from bursting, thecompany needed to raise capital at an accelerating rateand to see the price of its shares move continuously

Box 3.3 Financial swindles

upward. When the bubble burst and the share pricecollapsed, the directors of the South Sea Companywere held in breach of trust and ordered to make goodthe losses of investors out of their own funds.

Penny stocks are stocks that sell for pennies but havegreat potential according to their promoters. Modernswindlers use telemarketing (thanks to cheap long-distance phone rates and computerized telephone dial-ing) to reach thousands of people. By manipulatingstock prices and exaggerating the prospects of theircompanies, they induce greedy and gullible investorsto part with their money. When investors want to sell,the promoters pressure them not to; if the investorsinsist, the promoters may refuse to accept their sellorders or to answer their calls. Today schemes of thiskind are operated on an international scale. Swindlersare evidently part of the trend toward global finance.

eries of land, gold, and other natural resources;technological breakthroughs; or economic deregu-lation. Sometimes financial swindles were thecause, as in the first recorded insider-trading scan-dal, the South Sea Bubble of 1720 (see Box 3.3).Spectacular crises were common during the nine-teenth and early twentieth centuries. In 1816 andagain in 1825 banks failed in England when theywere unable to redeem their notes or meet thewithdrawals of their depositors. In 1857 manybanks collapsed in the United States. In 1866 thefailure of Overend, Guerney, one of the largestdiscount houses in the City of London, caused acrisis that had extensive repercussions throughoutthe world. In 1873 major banking crises occurred inboth Germany and the United States. In 1890, Bar-ing Brothers, a British private bank that sufferedlosses from underwriting a failed issue of Argen-tine securities, came close to collapse. In 1931-33 amassive crisis devastated the banking system ofthe United States. Banks in several Europeancountries also failed.

To contain the damage caused by such crises,central banks (notably the Bank of England and theBank of France) developed the lender-of-last-resortfacility. Initially, they acted as bankers to the gov-ernment but not to other banks. Gradually,prompted by the need to provide liquidity in timesof trouble, they evolved during the nineteenthcentury into bankers' banks. The development ofthe lender-of-last-resort facility was bedeviled by

46

the conflicting requirements of providing supportto the system without bailing out imprudent orfraudulent banks.

After the Great Depression, governments in sev-eral countries introduced new regulations. Thetoughest measures were taken in the UnitedStates. New rules prevented banks from holdingequities in industrial and commercial companieson their own account, from engaging in invest-ment banking, and from paying interest on de-mand deposits. The Federal Deposit InsuranceCorporation was created to provide insurance fordepositors' funds, and the Securities and Ex-change Commission was set up to supervise thesecurities markets. Coupled with continuing re-strictions on bank mergers and branching, thesemeasures constrained the growth of commercialbanks, which remained fragmented and were un-able to meet the long-term financing requirementsof American business. Instead, these were largelymet by the securities markets.

Other countries (including Canada, France, andItaly) also separated investment from commercialbanking and imposed maturity controls on thelending and deposits of commercial banks. In con-trast, neither Germany nor Japan (prior to WorldWar II) prohibited universal banking, and in Brit-ain such measures were irrelevant because the bigcommercial banks had specialized in deposit bank-ing of their own accord. Germany did enact de-tailed prudential controls, but universal banking

continued. The big commercial banks substantiallyincreased their involvement in industry during the1920s and 1930s, when widespread company fail-ures caused many debt claims to be converted intoequity.

The American banking crisis of the 1930s and itsimpact on the Great Depression have been muchdebated. Some have argued that the crisis and itseconomic repercussions were exacerbated by thefailure of the Federal Reserve System to provideadequate liquidity to stem the collapse of smallbanks. Others have stressed the banks' weak loanportfolios, which were concentrated in agricultureand real estate. The pattern of recent bank failuresin the United States, which is quite similar to thatof the 1930s, underlines the threat posed by poorloan diversification and excessive speculative fi-nancing of real estateboth of which can be at-tributed to restrictions on interstate banking andinadequate supervision of the banks. Recent stud-ies have also shown that security underwritingand investment banking had little to do with thebank failures of the 1930s. The present worldwidetrend toward universal banking argues for the abo-lition of the legal separation of commercial and in-vestment banking. At the same time there is agrowing recognition that effective prudential regu-lation and supervision are essential.

Financial systems in developing countries

The evolution of financial systems in developingcountries reflected their diverse political and eco-nomic histories. Latin American and Mediterra-nean countries, politically independent since atleast the first quarter of the nineteenth century,suffered frequent bouts of financial instability.These prevented the emergence of mature finan-cial systems. In contrast, developing countries inAfrica and Asia, under colonial rule until the endof World War II, enjoyed relative financialstabilitybut their financial systems suffered fromcolonial neglect and stagnation.

The financial systems of most developing coun-tries were heavily oriented toward agricultural ex-ports, other primary production, and foreigntrade. In Africa and Asia, financial systems cateredprincipally to expatriate communities. Financialservices for the indigenous populations were lim-ited. Foreign banks confined their operations toport towns and other centers of commerce wherethe expatriate communities were gathered. Thedomestic population, especially in Asia, hoardedprecious metals and jewelry. Hoarding was insur-

ance against financial emergencies caused by war,crop failure, natural disaster, and personalmishapbut it was saving denied to productiveinvestment.

Sound banking promoted financial stability inAfrica and Asia. Currency boards regulated themoney supply and maintained reserves that wereinvested in London and Paris. The financial sys-tems of most African countries, however, were un-derdeveloped until independence. They com-prised a few foreign colonial banks, post officesavings banks, cooperative societies, and money-lenders. Nigeria was the only African country withindigenous commercial banks before the late 1940s(see Box 3.4).

Financial development was more advanced inAsia. As in Africa, foreign banks confined theiroperations largely to the financing of foreign trade,but they also helped to finance internal trade. MostAsian countries also had a fairly well-developedindigenous banking system, with commercialbanks, cooperative credit societies, and informalbankers and moneylenders. India, in particular,had a sophisticated indigenous banking structure.It had evolved over several centuries, developingthe use of commercial bills known as hundi for fi-nancing nonlocal trade and relying on an elaboratesystem of personal relations to finance local,mostly small-scale activities (see Box 3.5).

Foreign banks operated in pre-1949 China,mostly in treaty ports, and some indigenous banks(shansi) remitted funds across regions and financedlocal trade. Foreign banks promoted foreign directinvestment in railroad construction, mining, andmanufacturing. They also made massive loans tothe Chinese government and in the process gainedcontrol of its customs and salt revenues. ModernChinese banks came into being in the 1930s. Theyhad close links with the government and the rulingfamilies and were able to seize the initiative fromforeign banks and emerge as the dominant group.After 1949 China built a monobanking system typi-cal of centrally planned economies.

Indigenous bankers and moneylenders wereable to meet the borrowing needs of local tradersand farmers by maintaining close personal contactwith them and acquiring intimate knowledge oftheir operations. Their services were accessible butexpensive. Informal financial institutions, such asrotating savings and credit associations (ROSCAs),also emerged in most countries (see Chapter 8).Indigenous bankers and informal financial institu-tions, however, could not mobilize the resourcesrequired for industrialization.

47

Box 3.4 Financial underdevelopment in Nigeria

In the late 1940s, Nigeria had a population of 30 millionand no more than twenty-nine bank branches. Seven-teen of these belonged to the Bank of British West Af-rica and eight to Barclays Bank (D.C.O.). The otherfour were branches of indigenous banks. In addition,Nigeria had a post office savings bank, a network ofcredit cooperatives, and later on some developmentcorporations. Moneylenders operated in the informalmarket alongside other informal institutions known asisusu.

Nigeria was the only country in Africa to developindigenous commercial banks (that is, banks incorpo-rated within the territory and owned and managed byAfricans) before the late 1940s. Three indigenous bankswere created in the 1930s to serve the African popula-tion, but of these only the National Bank of Nigeriasurvived. In the early 1950s the number of indigenousbanks increased, although most of them soon failed.Then in the years before and after independence, both

colonial and local banks greatly expanded the numberof branches so that by 1962 there were more than 200commercial bank branches.

African traders believed that the colonial banks weremostly concerned with maintaining the dominance ofexpatriate trading houses. Understandably, colonialbanks feared that loans to local traders and farmerscould be risky, but their failure to mobilize savings de-posits is harder to justify. Indigenous banks attractedfunds from the public by offering attractive interestrates, advertising (with an appeal to nationalist senti-ment), and opening branches. The expansion of bank-ing facilities by both colonial and local banks and theirsuccess in mobilizing deposits before and after inde-pendence indicated the potential for changing the sav-ings and financial habits of the local populationa po-tential that went untapped because of the colonialbanks' orientation toward the expatriate communities.

Box 3.5 Indigenous banking in India

At independence, India had an indigenous bankingsystem with a centuries-old tradition. This system haddeveloped the hundi, a financial instrument still in usethat is similar to the commercial bills of Western Eu-rope. Hundis were used to finance local trade as well astrade between port towns and inland centers of pro-duction. They were often discounted by banks, espe-cially if they were endorsed by indigenous bankers.

Indigenous bankers combined banking with other ac-tivities, much as the goldsmiths, merchants, and ship-pers of eighteenth- and nineteenth-century Europe haddone. They usually belonged to certain castes or com-munities, such as the Multanis, Marwaris, and Chet-tiars, and they differed in the extent to which theyrelied on their own resources, rather than deposits andother funds, for their lending. Indigenous bankers of-ten endorsed hundis issued by traders and sometimesprovided personal guarantees for loans from commer-

cial banks. Such bankers were collectively known asShroffs, a term that probably originally referred tomoney changers but over time came to refer to themore sophisticated and influential indigenous bankers.The main moneylenders were the Sowkars (who lent tofarmers from their own resources or funds borrowedfrom the Chettiars and other indigenous bankers) andthe Pathans (who lent mainly to poor people and oftenresorted to intimidation to ensure repayment).

Indigenous banking was based on an elaborate andextensive network of personal relations that overcamethe problems of dealing with large numbers of cus-tomers. Brokers were used for making introductionsand vouching for the creditworthiness of individualborrowers but did not offer personal guarantees. Somebrokers specialized in introducing indigenous bankersto commercial banks, while others brought togethertraders and indigenous bankers.

Throughout the nineteenth century, Latin Amer-ican countries relied too much on foreign capital.Argentina and a few other countries developed ac-tive mortgage-bond markets and stock exchangesalongside thriving but fragile banking sectors. Un-fortunately, however, recurring financial crises un-dermined attempts to develop the system ade-quately. Finance lagged behind the region'sachievements in infrastructure, agriculture, andmining. Instability resulted from too much foreign

48

borrowing; the overissue of currency; imprudentdomestic banking; speculation in commodity, se-curities, and foreign exchange markets; excess ca-pacity in industry and commerce; regional wars;and internal political unrest. Many of these were tofigure in the debt crisis of the 1980s.

Latin American economies ran for long periodswith inconvertible paper money, high inflation,and depreciating exchange rates. Producers andexporters of primary commodities welcomed this;

they stood to benefit and had a strong hold ongovernment policies. Latin American countries oc-casionally suspended the servicing of their exter-nal debt. Foreign lenders, however, were usuallylenient, probably because the region had immensepotential for profitable investment. Major interna-tional houses arranged so-called funding loans,such as the Brazilian loan of 1898, which had manyfeatures in common with the multiyear reschedul-ing agreements of recent years. In contrast, foreignlenders imposed strict controls on the finances ofmany other countries, such as China, Egypt,Greece, and Turkey. Their governments wereforced to cede revenues from stamp and customsduties and from state monopolies (on salt,matches, and tobacco) until the debts were fullyrepaid.

International banking crises seriously affectedthe financial markets of Latin America and theMediterranean countries. At the first signs of trou-ble, foreign banks withdrew capital by calling theirloans, reducing their advances, and pressing forremittances. The financial systems of Africa andAsia were better insulated, but their economieswere hit just as hard by the effect of financial tur-moil on international trade.

World War I and the depression of the 1930splayed havoc with the world economy. LatinAmerican countries were particularly affected bythe developmern of man-made raw materials andthe transformation of the British Commonwealthinto a protectionist bloc. Most of them defaultedon their foreign debts, but the central and otherstate banks that had been created in the 1920saverted the panics of earlier periods.

Before World War II, developing country govern-ments had a poor record on financial development.In Latin America and the Mediterranean countries,they failed to create sound legal and regulatorysystems and to maintain macroeconomic stability.Borrowers relied excessively on foreign capital,and financial systems were undermined by impru-dence. In Africa and Asia the restricted use of bankcredit, the limited spread of the banking habit, andthe persistence of the hoarding habit were all lega-cies of colonial banking systems that had failed toreach the indigenous population.

Financial regulation after World War II

After World War II, governments began to take agreater interest in the financing of high prioritysectors such as industrial investment, exports, andhousing. They created, or helped to create, credit

institutions that specialized in long-term finance.National investment banks or institutions, suchas Credit National in France and the IndustrialBank of Japan, promoted industrial developmentthrough medium- and long-term lending and eq-uity participations. They also encouraged the useof modern techniques of lending and creditappraisal.

Direct government intervention in the financialsystems of several industrial countries increasedwith the nationalization of large commercial banks(for example, in France and Italy) in the aftermathof the crisis of the 1930s and World War II. Publicsector bankspostal savings banks, postal giros,and savings banks linked with regional and localgovernment, as in Germany and Switzerlandalso extended their reach. Special export credit in-stitutions, such as the U.S. Export-Import Bank,supplied export finance.

Domestic and international financial activities ex-panded, new institutions such as leasing and fac-toring companies came into being, and the con-tractual savings institutions continued to grow.Noncommercial financial institutions, such as mu-tual and municipal savings banks, urban and agri-cultural credit cooperatives, building societies andsavings and loan associations, came to play aprominent part in financing small and medium-size enterprises, agriculture, and housing. Despitemergers, competition intensified because the de-marcation lines between different types of institu-tions were eroding and because domestic marketswere opening up to foreigners. In most countriesthe trend toward universal banking continued: thebig commercial banks moved into a variety of an-cifiary services, such as insurance brokering, fundmanagement, and securities transactions (see Box3.6).

Regulation, taxation, and the organization of so-cial security played a significant role in shaping thestructure of different financial systems. In theUnited States, commercial banks continued to beprevented from becoming nationwide, universalbanksalthough the development of bank holdingcompanies made the restrictions less binding. Atthe same time, the growth of funded occupationalpension schemes increased the supply of long-term funds to the securities markets. Australia,Britain, and Canada saw similar developments, al-though none placed restrictions on nationwidebanking.

In Germany and other continental Europeancountries, securities markets played a muchsmaller role in the financial system. This was be-

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Box 3.6 Universal banking

One of the most important trends in financial marketsin recent years has been the spread of "universalbanking." This term has different meanings but usu-ally refers to the combination of commercial banking(collecting deposits and making loans) and investmentbanking (issuing, underwriting, placing, and tradingcompany securities). It also involves close links andextensive consultations between banks and industry.Universal banking has been criticized for threatening toconcentrate excessive power among a few banks andfor introducing potential conflicts of interest. Adequateregulation and supervision ought to overcome thesedifficulties, especially if securities markets and otherfinancial institutions are able to compete effectively.

Universal banking began in Belgium with the SociétéGénérale de Belgique in 1822. Its initial impact wasrather small, but it attracted considerable attention fol-lowing the creation of Credit Mobilier in France in1852. By the 1860s similar institutions had been formedin Italy and Spain, but most of these ran into trouble.Universal banking was put on a more solid basis inGermany when Deutsche Bank and Commerzbankwere set up in 1870 to finance foreign trade. They werelargely unaffected by the company failures in Germanybefore the international crisis of 1873, and after 1876they gradually became universal banks with an exten-sive deposit business and close links to Germanindustry.

The German universal banks helped to establishmany large industrial companies and presided over thegradual concentration of industry in Germany. Theirexpanding role in industrial finance coincided withtechnological advances that greatly increased their cli-ents' capital requirements. With seats on supervisoryboards and proxy voting rights on behalf of individualshareholders (who deposited their shares with thebanks), they began to exercise tremendous influence.

Universal banking in Japan dates from the 1870s,when traditional trading houses such as Mitsui wereallowed to establish joint-stock banks. It increased inimportance after the emergence of the zaibatsu con-glomerates, which had extensive interests in industry,commerce, banking, and finance. The zaibatsu banksbecame more prominent after the 1920salthoughsome of the most important banks of that period, suchas Yasuda (now Fuji) and Dai-Ichi, had close links withvarious zaibatsus without being formally incorporatedwith them.

In the United States, state-chartered commercialbanks operated as universal institutions along the linesof German banks, underwriting and distributing cor-porate securities until the Great Depression. Nationalbanks were prevented trom engaging in investmentbanking (although in 1927 they were allowed to under-write corporate securities on the same basis as state-chartered banks). But by the turn of the century, thebig New York banks had combined with private bank-

ers and trust and insurance companies to create largeindustrial trusts. Britain and France, after the failuresof the 1860s, were perhaps the only countries in whichthe leading commercial banks specialized in depositbanking and short-term, self-liquidating lending. Afterthe Great Depression, commercial and investmentbanking were legally separated in the United States,Canada, and several European countriesbut not inGermany, Japan, and Britain (where functional special-ization continued to be based on tradition).

Universal banking began to spread again after themid-1960s. In Germany the large commercial banks areactively involved in investment banking and in theGerman stock exchanges. They provide both short-and long-term debt finance to industry, hold equity inindustry (although their equity holdings are concen-trated in a few large companies), and exert a stronginfluence on corporate affairs. Swiss and Dutch banksare similar, except that they do not hold direct equitystakes in industrial companies. In Sweden, commercialbanks are authorized to act as stockbrokers, but theyare not allowed to hold equity except through holdingcompanies. In Belgium, holding companies such as theSociété Géndrale de Belgique have large equity stakesin both banks and industrial companies. Many indus-trial countries (for example, Belgium, Britain, Canada,France, and Greece) have reformed the membershipregulations of their stock exchanges to allow banks andother financial institutions to act as stockbrokers. Inrecent years, universal banking practices have beenadopted by the large commercial banks in Britain andFrance, which also have considerable interests in insur-ance business.

In Japan, the zaibatsu groups were dismantled afterWorld War II, and commercial and investment bankingwere legally separated. Banks exert their influencethrough the new industrial groups, and relations be-tween banks and industry are close. Equity holdingsare limited, but Japanese financial practice gives debtan equity-like role.

The success of universal banking seems to reflect notonly the economies of scale and scope enjoyed by largeand diversified financial institutions but also the impor-tance of universal banks in monitoring corporate per-formance and controlling the behavior of corporatemanagers. With the convergence of the world's finan-cial systems, securities markets and institutional inves-tors have a bigger role in Germany and Japan, andcommercial banks are becoming more involved in in-vestment banking in Britain, Canada, Japan, and theUnited States. Concerns about the concentration ofpower and conflicts of interest can be met by regulationand supervisionfor example, by requiring that aseparate subsidiary handle securities tradingandby the development of securities markets and otherintermediaries.

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cause savers sought safety and liquidity; generoussocial security systems organized on a pay-as-you-go basis worked to the same end. Universal bank-ing forged closer relations between banks and in-dustry. There were differences within Europe (inattitudes toward universal banking, for example,and in the extent of government intervention), butthe common features were the secondary impor-tance of securities markets and institutional inves-tors and the greater influence of banks in corporatefinance.

In Japan, the zaibatsu conglomerates were dis-mantled after World War II at the behest of theAmerican authorities. Investment banking wasseparated from commercial banking, and thegrowth of securities markets was encouraged.However, industrial groups, although less signifi-cant than the earlier zaibatsus, grew up around themajor banks and large general trading companies.They came to play a central role in the industrialreconstruction of postwar Japan and promotedclose relations between industry and finance. Theregulatory framework favored the provision ofbank loans for industrial investment. As in Eu-rope, the securities markets and institutional in-vestors played relatively minor roles in the finan-cial system.

Most developed countries used direct controls toregulate the overall expansion of credit and to in-fluence the sectoral allocation of financial re-sources. Several countries put interest rate ceilingson deposits and loans and restricted the banks'branch networks. But the mix of controls and regu-lations varied widely. The authorities in the UnitedStates and Germany did not set credit ceilings, al-though they conducted selective credit policiesthrough special institutions. Britain set credit ceil-ings for purposes of monetary control and usedsome selective credit devices, but for the most partit did not use interest rate controls or branchingrestrictions. France, Italy, Sweden, and other Eu-ropean countries all used detailed and comprehen-sive controls. France adopted medium-term refi-nancing schemes, levied special taxes on interestpaid and received, and put caps on lending mar-gins. Similar controls have been widely applied inthe Francophone countries of North and Sub-Saharan Africa. Japan used interest rate andbranching controls and influenced the allocation ofcredit to high priority sectors through the so-called"overloan" position of large commercial banks.

Many countries provided a fiscal bias in favor oflong-term saving through life insurance policiesand occupational pension schemes. Home owner-ship and housing finance benefited from generous

fiscal incentives, and specialized housing financeinstitutions enjoyed considerable fiscal and regula-tory advantages. Since bank deposits and creditsoften faced ceilings or other controls, housing fi-nance and contractual savings assumed great im-portance in most industrial countries.

Financial innovation since the 1970s

In the late 1960s and early 1970s, high inflation andchanges in financial markets undermined many ofthe credit and banking controls then in use. Sev-eral countries, including Britain, Canada, France,the Netherlands, and Sweden, enacted a series ofwide-ranging banking reforms. These abolishedthe distinctions among different types of institu-tion, relaxed both global and selective credit con-trols, removed branching restrictions, and liberal-ized interest rates on lending and wholesaledeposits.

Financial deregulation was interrupted by themacroeconomic turmoil that followed the rise in oilprices in 1973. Many countries reimposed creditcontrols, hoping to contain monetary expansionwithout raising interest rates. But deregulation re-sumed in the late 1970s. It ranged from the elimi-nation or relaxation of controls on credit, interestrates, and foreign exchange to the removal of re-strictions on the activities of institutions and onnew financial instruments. In most countries thechanges were cautious and gradual. This con-trasted sharply with the experience of some LatinAmerican countries.

Deregulation was prompted by the growing real-ization that direct controls had become less effec-tive over time. The growth of the Euromarkets, thedevelopment of new financial instruments, andthe advent of electronic technology all made it eas-ier to bypass the restrictions. Governments alsorecognized that the prolonged use of directed andsubsidized credit programs would lead to the inef-ficient use of resources and hinder the develop-ment of better systems.

The Eurocurrency markets are markets in whichassets and liabilities denominated in a particularcurrency are held outside the country of that cur-rency (dollar-denominated assets held outside theUnited States, for example). These markets firstappeared in the 1960s and have greatly contributedto the financial innovations of the past twentyyears. They have regulatory and fiscal advan-tagestransactions are anonymous, exempt fromreserve requirements, and exempt from the inter-est equalization tax that was imposed on foreignborrowings in the New York markets in the mid-

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1960s. They speeded the international transfer offinancial technology. However, one result of theirgrowth was an excessive emphasis on the expan-sion of bank lending, which led in the end to thedeveloping country debt crisis of the 1980s.

In the 1960s the main innovations of the Euro-currency markets were revolving medium-termfloating rate credit facilities and the syndication oflarge Eurocredits among several participatingbanks. Later innovations included changes in ma-turity patterns (very short-term Euronotes andEurocommercial paper, and perpetual debt instru-ments), in pricing (floating rate notes and zero-coupon bonds), and in funding options (complexconvertible bonds and bonds issued with war-rants). These innovations blurred the traditionaldistinctions between equity and debt, short-termand long-term debt, and bank debt and marketablesecurities. The development of swaps broughtabout greater integration of markets through theinternational diffusion of new instruments and theopening up of national markets previously closedto Euromarket activity.

Most industrial countries have encouraged thedevelopment of government bond markets, so thatthey can finance their public sector deficits in anoninflationary way, and have established or re-vived their money markets, so that monetary andcredit control can be achieved through open mar-ket operations. All this marks a considerable shiftin the balance of power from governments to fi-nancial markets. In addition, equity markets havebeen reformed to allow commercial banks to playan active part as market makers and securitieshouses, and new markets with less demandinglisting requirements have been created for smallercompanies. Governments have used fiscal incen-tives to stimulate venture capital and personal in-vestments in mutual funds and equities. Financialfutures and traded options markets have been es-tablished to allow hedging against the greater vola-tility in exchange rates, interest rates, and equityprices that followed the move to floating exchangerates and the use of indirect methods to controlmoney and credit.

Recent years have also witnessed a major expan-sion in international transactions fueled by the ac-cumulation of insurance and pension reserves andthe liberalization and modernization of stock ex-changes. As in the nineteenth century, however,this expansion of capital flows has exerted a de-stabilizing influence on markets, because foreigninvestors tend to repatriate their funds in troubledtimes.

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Effective competition in banking, especially forcorporate business, has increased with the open-ing of domestic markets and the creation of spe-cialized nonbank financial intermediaries. But re-tail banking has also become more competitive,because commercial banks are turning toward thehousehold sector and offering new credit, deposit,and payment instruments.

Deregulation has eliminated many of the man-made barriers to global finance, and technologyhas lowered the barriers imposed by nature. Ad-vances in computing, information processing, andtelecommunications have boosted the volume ofbusiness by reducing transaction costs, expandingthe scope of trading, and creating information sys-tems that enable institutions to control their riskmore efficiently.

Deregulation, technology, and other commontrends have caused a growing convergence of na-tional financial systems. Universal banks and spe-cialized institutions as well as institutional inves-tors and securities markets all now play importantparts in the financial systems of most high-incomecountries. Nowhere is this convergence more evi-dent than in Japan, which has successfully ex-panded the nonbanking segments of its financialsystem to the point that it now has the largest se-curities houses and stock market in the world, aswell as the largest commercial banks, postal sav-ings bank, and housing finance institution.

The trend of convergence has been reinforced bythe vast accumulation of financial assets by bothhouseholds and corporations in most high-incomecountries (Figure 3.1). This underscores the grow-ing importance of the financial sector as a serviceindustry and its shift from the mobilization andallocation of new financial savings to the manage-ment and reallocation of existing resources.

Current policy concerns in industrial countries

Since the late 1970s the focus of financial regula-tion has also shifted. There is now less emphasison product and price controls and more on pru-dential regulation and supervision. Another goalhas been to promote competition. Financial sys-tems are undoubtedly more efficient as a result.But some of the changes have caused concern indeveloped countries. Financial institutions are ex-posed to greater risks, the potential for conflicts ofinterest between institutions and their customershas increased, and the implications for the long-term performance of industrial and commercialcorporations are unclear. The widespread distress

of deposit institutions in the United States andNorway in the 1980s underlines the growing riskexposure of financial institutions in a deregulatedbut inadequately supervised system (see Box 5.4 inChapter 5).

International efforts to regulate the risk exposureof financial institutions yielded the recent agree-ment, under the aegis of the Bank for InternationalSettlements, on new capital requirements for com-mercial banks, based on risk weights for differenttypes of assets. In the Eurobond and Eurocreditmarkets, concern centers on the risks taken bybanks in the pursuit of new business and on poorprofitability due to fierce price competition.

Developments in the equity markets have raiseddifferent issues: insider trading, the growing num-ber of hostile takeovers, and the methods used bycorporate raiders and incumbent managements totake or retain control. Hostile takeovers may pro-mote efficiency, but they also cause an accumula-tion of corporate debt and may worsen the con-flicts of interest between managers, shareholders,and bondholders. There is also concern that insti-tutional investors and corporate managers stressshort-term performance at the expense of long-term efficiency. So far, however, the evidence hasbeen inconclusive.

The next chapter will review the systems of fi-nance in place in developing countries and assessthe interventionist role played by government inthe pricing and allocation of credit. Perhaps themost important lesson to be learned from the expe-rience of the high-income countries is that the fi-

nancial decisions of private agents are alsoimperfectwitness the savings and loan debacle inthe United States and the excessive lending ofcommercial banks to developing countries in the1970s. The future is uncertain. Under any systemof finance mistakes will be made. Market-based fi-nancial systems, like public ones, are subject tofraud and instability. The goal is not perfection buta system which mobilizes resources efficiently,minimizes allocative mistakes, curbs fraud, andstops instability from turning into crisis.

Governments must certainly play their part. Inmost high-income countries, they continue to in-fluence the pricing and allocation of credit, butonly to a modest extent. Their main concern is toregulate and supervise financial institutions andmarkets while maintaining a stable macroeco-nomic environment. The need for prudential regu-lation increases as financial systems becomedeeper and more complex. From the developmentof the lender-of-last-resort facility during the nine-teenth century and the introduction of deposit in-surance after the Great Depression to the recentemphasis on risk-weighted capital requirementsand the growing adoption of regulation by func-tion rather than by institution, a main concern offinancial regulation has been the achievement ofstability without undermining efficiency. But fi-nance remains a dynamic field, changing far toorapidly to achieve a perfect balance between thefreedom needed to stimulate competition andgrowth and the control needed to prevent fraudand instability.

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/4/Financ sector issues

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in developing countries

Governments have made control over finance animportant tool of their development strategies dur-ing the past few decades. Most believed that with-out intervention their financial systems would notbe cooperative partners in the development effort.Dependent in the 1950s and 1960s on imports ofmanufactured goods and exports of agriculturalproducts and raw materials, developing econo-mies adopted a variety of strategies to promoterapid industrialization and the modernization ofagriculture. A few, such as Hong Kong, the Re-public of Korea, and Singapore, attempted fromearly on to integrate their economies with interna-tional markets. Most countries, however, pursuedan industrialization strategy based on import sub-stitution. Some provided only moderate and rela-tively uniform protection to domestic industries,primarily through tariffs, and others (Argentina,India, and Tanzania, for example) provided exten-sive protection through high tariffs and quantita-tive import restrictions.

Developing country governments also took anactive role in economic decisionmaking. At thevery least, governments owned and controlledcapital-intensive infrastructure such as roads,ports, water and electric power utilities, and tele-communications. Many also controlled selectedenterprises in heavy industry and natural resourceextraction. Several countries went further, bring-ing other industrial and commercial enterprisesunder government control as well. In centrally

planned economies, large-scale production wascarried out by government entities to the virtualexclusion of independent organizations, decentral-ized decisionmaking, and market forces.

Although the extent of intervention variedamong countries, nearly all governments consid-ered it necessary to intervene in the financial sectorin order to channel cheap credit toward the sectorsthat were to be at the forefront of development.The financial systems of most developing coun-tries in the 1950s and 1960s could not adequatelysupport a process of industrialization and agricul-tural modernization. Formal financial systems usu-ally consisted of a few institutions, often foreign-owned, which had branches in the major citiesonly. These provided financing mainly to tradingcompanies, mines, and plantations, which wereoften foreign-owned as well. Local businesses haddifficulty borrowing from banks; local farmers hadno access to them at all. An indigenous informalfinancial sector made up of moneylenders, traders,and pawnbrokers provided loans to farmers andsmall businesses (see Chapter 8). Informal lenderscharged high rates, however, and the scale of lend-ing was small. There were few sources of equityand long-term finance for industry, and what wasavailable was expensive. In some countries thebanks were owned by industrial groups. This re-duced the access of outsiders to finance and con-centrated a great deal of wealth and power in thehands of a few.

Chapter 2 stressed the roles of risk, information,and transaction costs in determining the supply offinance. In developing countries, investment wasrelatively risky. Production was in new sectors andused technologies unfamiliar to the work force, en-trepreneurs and managers were inexperienced,and marketing channels had not been developed.Natural calamities and fluctuating commodityprices could drastically affect the incomes offarmers. Government policy was a constraint anda source of uncertainty: trade and pricing policiesdiscriminated against exports and agriculture; de-valuations and tariff changes could radically alter afirm's competitive position and the cost of servic-ing its foreign debt; trade and foreign exchangerestrictions could reduce access to needed imports.Volatile inflation caused abrupt swings in relativeprices, periodic recessions reduced product de-mand, and government borrowing crowded firmsout of the financial markets.

Furthermore, the instruments and marketsthrough which risks could be pooled or transferredwere undeveloped. Financiers lacked the tools toevaluate, price, and monitor risks. The weaknessof accounting, auditing, and disclosure regulationslimited the information available to lenders aboutborrowers. Legal procedures for collateral andforeclosure were poorly specified. These factors,together with uncertainty about borrowers' pros-pects and the future inflation rate, deterred credi-tors from providing long-term funds; lack of infor-mation and collateral discouraged banks fromlending to farmers and small businesses.

Governments could have tried to increase thewillingness of creditors to provide long-term fi-nance and equity capital by modernizing legal sys-tems and making contracts more easily enforce-able; by clarifying property rights and improvingtitle transfer and loan security; by improving bankregulation and supervision; by training accoun-tants and auditors; and by ensuring adequate dis-closure of information. Chapter 6 discusses suchchanges in more detail. But institution buildingtakes time. Understandably, many governmentswanted faster results. Moreover, many wanted touse the financial system for such purposes as allo-cating resources to projects with high social re-turns, redistributing income, reducing costs instate-owned enterprises (SOEs), and offsetting theeffects of an overvalued exchange rate and restric-tive trade policies.

Rather than lay the foundations of a sound fi-nancial system, most governments concentratedon intervention designed to channel resources toactivities that they felt were poorly served by exist-

ing financial institutions. Toward this end, theynationalized the largest, and in some cases all,commercial banks; in Costa Rica, India, Indonesia,Mexico, and Pakistan, for example, the majority ofbanking system assets are government-owned. Inaddition, they created and supported develop-ment finance institutions (DFIs), which were spe-cifically mandated to provide long-term finance toparticular sectors. Governments applied interestrate and credit allocation controls to public andprivate institutions alike and ordered banks toopen branches in rural areas. Bilateral and multilat-eral aid agencies participated in targeted creditprograms by providing financial support and insti-tutional assistance.

Governments in high-income countries also in-tervened in their financial systems. Although theyexerted some influence over the flow of credit, in-terest rate and credit controls were less extensivethan in developing countries. The principal em-phasis was instead on measures designed to safe-guard the stability of the financial system. In de-veloping countries, however, governments paidinadequate attention to regulatory and prudentialmatters, to the detriment of their financialsystems.

Government interventionin credit allocation

Developing country governments have played alarge role in credit allocation. For example, in Paki-stan in 1986, 70 percent of new lending by the na-tional banks, which dominate the banking system,was targeted by government, although this pro-portion was reduced substantially by 1988. In Indiaabout one-half of bank assets had to be placed inreserve requirements or government bonds, and40 percent of the remainder had to be lent to prior-ity sectors at controlled interest rates. In Yugo-slavia in 1986, 58 percent of short-term loans weredirected credits. In Brazil in 1987, governmentcredit programs accounted for more than 70 per-cent of the credit outstanding to the public andprivate sectors. In Turkey in the early 1980s,roughly three-quarters of all financial system ad-vances were made at government directive or atpreferential interest rates, or both, although theproportion has since fallen (see Box 4.1). In Malay-sia directed credit has accounted for an estimated30 percent of bank portfolios.

Many such regimes were immensely compli-cated. At one point Korea had 221 formal directedcredit programs. In 1986 the Philippines had forty-nine schemes for agriculture and twelve for indus-

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Box 4.1 Directed credit in Turkey

In the early 1980s roughly three-quarters of all ad-vances from the Turkish financial system were made atgovernment directive, at preferential interest rates, orboth. The preferred borrowers were the public admin-istration, state-owned enterprises, farmers, exporters,artisans and small firms, house buyers, industrial in-vestors, backward regions, and so on. Within agricul-ture, there were programs for sales cooperatives, creditcooperatives, and the like. Programs in other sectorswere also subdividedfor example, by loan maturitywith different interest rates and conditions for each.Banks were also required to place 20 percent of theirdeposits in medium- and long-term credits.

To help banks defray the cost of loans at low interestrates, the Interest Rate Rebate Fund subsidized prefer-ential credits by levying a surcharge on nonpreferentialcredits. The central bank operated an extensive systemof rediscounts for priority sectors. In addition to thesebasic systems, the State Investment Bank (which lentto state-owned enterprises and has since been abol-ished) received special loans from the Treasury andfrom the social security system at favorable interest

rates, the central bank provided low-interest loans di-rectly to state-owned enterprises, and the governmentkept substantial noninterest-bearing deposits at theAgricultural Bank.

In the early 1980s these policies helped to push realinterest rates on nonpreferential credit to between 30and 50 percent. Rates remain high today, but the largepublic sector borrowing requirement is now the maincause. The government has recently liberalized thecredit system. Direct credit and rediscounts madeavailable by the central bank were reduced from 49percent of total credit in 1980 to 18 percent in 1987. By1986 there were only five categories of central bankrediscount rates; three years earlier there had beenthirty. The proportion of credit extended on preferen-tial terms (defined as credits bearing negative real in-terest rates) declined from 53 percent at the end of 1983to 35 percent in September 1987. Preferential credit isnow provided only for agriculture, industrial artisans,exports, and housing. Interest rates on short- andmedium-term directed credit were raised substantiallyin early 1988.

try. Interest rates, maturities, and eligibility criteriawere often different for each program.

Directed credit programs usually targeted indus-try, state-owned enterprises, agriculture, smalland medium-scale firms, and (to a lesser extent)housing, exports, and underdeveloped regions. Inthe case of industry the aim was to providecheaper long-term finance and foreign exchangeand thus to promote investment and rapid indus-trialization. In the case of agriculture it was to raiseoutput and speed the introduction of new technol-ogies. Credit directed to small enterprises was in-tended to generate employment; in housing, theintent was to provide affordable homes for poorhouseholds. Export credit programs sought tobridge the period between production and pay-ment and to compensate exporters for industrialand trade policies that were biased against them.

Interventions were of five main types: lendingrequirements imposed on banks, refinanceschemes, loans at preferential interest rates, creditguarantees, and lending by DFIs. In Brazil com-mercial banks were required to allocate between 20and 60 percent (depending on bank size) of theirnet sight deposits for agriculture. In Mexico bankswere required until recently to use 31, 10, 6, and1.6 percent of their deposit and other liabilities for

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lending to the government, DFIs, housing, and ex-ports, respectively. Forced lending has now beeneliminated as part of a comprehensive financial lib-eralization program. Banks in Burundi, Turkey,and Tunisia had to use 8, 20, and 43 percent re-spectively of their deposits (or other categories ofassets and liabilities) for medium- and long-termlending or investment in public sector bonds (al-though in Tunisia the requirement has recentlybeen reduced). In Nigeria banks were required un-til recently to comply with a scheme in whichcredit was allocated among sixteen sectors; portfo-lio requirements now apply to only two sectors,agriculture (15 percent) and manufacturing (40percent).

In many countries commercial banks, and some-times also DFIs, could refinance loans to preferredsectors on attractive terms. Bangladesh has twelverefinancing schemes. Turkey in 1983 had aboutthirty categories of rediscount rates, although by1986 it had only five. Indonesia's central bank op-erates thirty-two different schemes. In a sample ofsixty-five developing countries more than half hadexport refinance schemes. Many of the banks ini-tially attracted by the interest rate spreads in theseprograms later found them inadequate to cover thehigh default rates.

Governments often specified preferential inter-est rates for lending to priority sectors. These rateswere substantially lower than those on regularloans, which themselves were often kept artifi-cially low. In Peru in 1980-82 the average differen-tial between general and preferential real rates was32 percentage points; the corresponding figure inTurkey was 36 percentage points.

Some governments have also provided guaran-tees. In high-income countries credit guaranteesare the main form of assistance to small busi-nesses. At least seventeen developing countriesincluding Cameroon, Colombia, India, Korea, Ma-laysia, Morocco, Nepal, the Philippines, and SriLankahave established formal guaranteeschemes for small and medium-scale enterprises.Guarantees and crop insurance have also beenused in support of agriculture in countries such asBrazil, India, Mexico, Panama, and Sri Lanka. Atleast ten developing countries have guaranteeschemes for preshipment export credit; even morehave export insurance schemes.

Development finance institutions have been per-haps the most common means of directing credit.They were actively encouraged and supported bybilateral and multilateral creditors. Virtually all de-veloping and high-income countries have at leastone, and many have a special institution for eachpriority sector. Kenya, for example, has five gov-ernment DFIs and three others in which the gov-ernment has a big stake: one each for agriculture,tourism, and housing; four for industry; and onethat serves the former East African Community.Brazil and India both have complex systems of na-tional and state DFIs. The importance of DFIs var-ies from country to country, however. IndustrialDFIs accounted for less than 10 percent of creditoutstanding to manufacturing in Malaysia andThailand in 1987, whereas in Mexico and Turkeythey accounted for around one-third. In Morocco,the three sectoral DFIs accounted for 79 percent ofall long-term finance. In some countries virtuallyall formal credit for agriculture and housing is pro-vided by public institutions.

The impact of directed credit programson credit and growth

It is impossible to be precise about the effect ofdirected credit on the allocation of resources. Insome countries it is likely that the programs havehad little impact, because they supported lendingwhich would have happened anyway, becausethey offered only weak incentives, because direc-

tives were not enforced, or because the programscovered only a small share of total credit. In othercountries, however, directed credit programs had asignificant effect. In Korea, reflecting the bias ofcredit directives, industry's share of credit in-creased from 44 percent to 69 percent between1965 and 1986. In Pakistan and Tunisia there was asharp decline in the share of commerce in totalcredit; this too reflected the bias of directed creditin favor of other sectors.

State-owned enterprises in some countries haveclearly benefited from directed credit, especially ifforeign financing is taken into account. The shareof SOEs in nongovernmental borrowing from do-mestic banks in 1983-85 was 56 percent in Guyana,43 percent in Mexico, 25 percent in Nepal, and 18percent in Brazil. The share of SOEs in valueadded was much lowerin Guyana and Mexiconot more than 25 percent and in Brazil and Nepalless than 5 percent. The foreign obligations ofSOEs now account for more than half the externaldebt of Brazil, the Philippines, and Zambia. By1986 the outstanding stock of foreign loans toSOEs for a sample of ninety-nine developing coun-tries was twice that to the private sector. AlthoughSOEs are capital-intensive, and therefore might beexpected to borrow heavily, the way in which theenterprises were managed is a large factor in theirhigh indebtedness. Artificially low prices, exces-sive staffing, or activities that were inherently un-viable have resulted in low profits and low re-tained earnings. Borrowing was necessary not justfor investment but also to cover losses.

In some countries, such as Ecuador (see Box 4.2)and Sri Lanka, lending programs for small andmedium-size enterprises are succeeding in attract-ing the participation of local banks. Small firmsalmost everywhere continue to have difficulty ob-taining funds, however. Lenders have avoidedparticipating in schemes or have concentratedtheir support on the wealthier enterprises. Bankshave been reluctant to use guarantees because theprocedures are slow and complicated.

Export credit programs have increased ex-porters' share of credit in several countries. But theschemes have sometimes been narrow in cover-age. In many countries they have not applied toindirect exporters, and small and new exportersalso have difficulty. Preshipment refinance is notalways automatic and fluctuates with changes inmonetary and credit policy.

Although individual sectors have benefited fromdirected credit, the overall effect on growth is hardto gauge. Fast- and slow-growing countries alike

57

Box 4.2 Lending program for small enterprises in Ecuador

In 1980, Ecuador's Corporación Financiera Nacional,the country's largest government-owned developmentfinance institution, established a fundFondo de Fo-mento para la Pequena Industria y la ArtesanIa(FOPINAR)to refinance loans from local financial in-stitutions to small enterprises. The fund is autonomousand operates from a head office in Quito as well asfrom regional branches. Its financing has come princi-pally from multilateral institutions via the government,which bears the foreign exchange risk. At the end of1988, FOPINAR had approved the refinancing of 7,467loans averaging $14,000. Enterprises outside the mainurban centers have received 48 percent of the loans (byvalue).

There are now some forty participating financial in-termediaries. The government-owned Banco de Fo-mento Nacional (BFN), primarily an agricultural bank,accounts for 45 percent of the loans to about 75 percentof the borrowers. Private development finance institu-tions and commercial banks account for the rest. (Thefour most active banks account for around 23 percent oftotal lending, and other banks and finance institutionseach account for between 1 and 3 percent.) To partici-pate in the program, the institutions must meet criteriaregarding the quality of their FOPINAR portfolio, theiroverall debt-to-equity ratio, and their standing with thecentral bank and the superintendency of banks. In or-

have intervened extensively in credit allocation.What matters is whether those who thereby re-ceived directed credit used their resources moreproductively than those who were denied creditwould have. This is almost impossible to ascertain,although in some countries well-designed creditprograms undoubtedly did improve resource allo-cation. In countries with highly protectionist traderegimes and macroeconomic instability, directedcredit reinforced existing distortions. When struc-tural adjustment was finally undertaken, many ofthe firms that had been financed became unprofit-able. In countries that minimized price and otherdistortions and maintained macroeconomic stabil-ity, directed credit appears to have been moresuccessful.

Credit programs can be useful when used totackle the inadequacies of financial markets. Forexample, in countries without venture capital orequity finance, new and risky firms have found itdifficult to obtain outside financing. Rather thanforgo these investments, governments have di-rected commercial banks and DFIs to provide the

58

der to encourage the participating institutions to be-come more independent, the program requires them toprovide 10 percent of project costs from their own re-sources. Terms and conditions have been designed toprovide FOPINAR and the institutions with adequatespreads (currently 2.5 percent and 5.0-6.0 percent re-spectively) and to keep interest rates to borrowers posi-tive in real terms. The latter goal has not been fullyachieved, mainly because of the very high inflation ofthe past year and the lack of an automatic procedurefor adjusting interest rates.

Collection has been quite good. Arrears on theFOPINAR portion of the discounted loans of the pri-vate development finance institutions and commercialbanks have averaged less than 3 percent. In June 1988arrears represented about 11 percent of their overallportfolios.

FOPINAR's independence has allowed it to respondflexibly to changing conditions. FOPINAR actively pro-moted the program and set terms that were sufficientlygenerous to attract the financial institutions. It hashelped to train the institutions' staff, and they andFOPINAR have accorded a high priority to supervisingthe loans. Automatic debiting of the institutions foramounts due to FOPINAR gives them an incentive tojudge their lending carefully.

necessary financing. Because of the high risk, in-terest earnings have not covered portfolio losses,and lenders (or their guarantors) have frequentlylost money. It is possible, however, that some ofthe high-risk firms have been sufficiently success-ful to compensate for the poor performance of oth-ers and that the overall program produced a netgain for the economy. Yet few governments andDFIs have turned out to be successful venture capi-talists. Equity finance is a more appropriate way tofinance risky ventures than bank loans. If govern-ments establish the conditions necessary for equityfinance, intervention will not be necessary.

Even well-designed credit controls tend to loseeffectiveness if maintained too long. Moreover, thepotential for mistakes grows as economies becomemore complex. The Korean government, for exam-ple, exercised extensive control of credit allocationthrough a combination of moral suasion and ex-plicit programs. The policy was successful: theeconomy grew rapidly. Nevertheless, the govern-ment made mistakes in the latter half of the 1970s,encouraging large investments in shipping and

heavy industry that resulted in excess capacity andslower growth in the early 1980s. Recognizing theinefficiencies of excessive intervention, the govern-ment has begun to liberalize its financial policies(see Chapter 9).

Directed credit programs have often been usednot to correct the inadequacies of financial marketsbut to channel funds to priority sectors regardlessof whether these were the most productive invest-ments. Policies aimed more directly at goods mar-kets or at the distribution of incomeprice reformin agriculture, grants for the poor, and so onmight have been more successful and would haveavoided many of the drawbacks of directed credit.

Problems of directed credit programs

The interest rates charged on directed creditsoften deviated substantially from rates on non-preferential credit. The large implicit subsidy hadto be borne by someone. Subsidies have some-times been covered by low-cost loans from interna-tional agencies, by a charge against public spend-ing, or by cheap rediscounts from the central bank.Otherwise, they had to be covered by cross-subsidization: higher rates charged to other bor-rowers, lower rates paid to depositors, smallerprofits (or greater losses) for financial institutions.Such subsidies were often substantial: in Brazil in1987 they were estimated at between 4 and 8 per-cent of GDP. In Mexico subsidies relating to devel-opment finance institutions and official trust fundswere estimated to average 3 percent of GDP dur-ing 1982-87. Subsidies of this magnitude, whenfinanced by the central bank or charged to the gov-ernment budget, have compromised efforts atmonetary or fiscal restraint.

Subsidized credit often failed to reach its in-tended beneficiaries. Lenders misclassified loansin order to comply with central bank directives.Within priority sectors, larger and more influentialborrowers benefited most. Much was at stake: ac-quiring subsidized credit could sometimes addmore to profits than producing goods. A review often small and medium-scale industry projectsshowed that the distribution of loans was skewedin favor of larger firms. Studies of agricultural andhousing programs show similar results. Directedcredit programs do redistribute income, but notnecessarily in favor of the poor (see Box 4.3). Fur-thermore, when rates of return in targeted activi-ties were lower than elsewhere, borrowers did notuse directed credit as intended. A study of an agri-cultural scheme in Colombia found that nearly half

Box 4.3 Credit and incomeredistribution in Costa Rica

In Costa Rica, subsidized agricultural credit hasbeen extended by four commercial banks, allgovernment-owned. They were well positioned toreach the small farmer. By the mid-1970s the threesmaller banks had more than thirty regional of-fices and the largest (Banco Nacional) had morethan a hundred, two-thirds of which were ruraloffices specializing in credit for small farmers.

Data for Banco Nacional, which accounted for60 percent of agricultural credit disbursed, revealthat in 1974 just 10 percent of its agricultural loansaccounted for 80 percent of the total agriculturalcredit it extended. The distribution of agriculturalcredit (and hence subsidies) disbursed by BancoNacional was actually more skewed than the dis-tribution of income and land. Low interest rateson the loans implied subsidies equivalent to 4 per-cent of GDP and almost 20 percent of value addedin agriculture. That suggests an average creditsubsidy of $10,210 on each of the big loans thataccounted for 80 percent of the credit. In 1974 afamily with an income of $10,500 was in the top 10percent of the income distribution.

the funds had been diverted to other uses. Koreahad an active curb market in which those with ac-cess to subsidized credit at times lent to otherswithout.

By limiting the availability of credit to nonprior-ity firms, directed credit programs have crowdedsuch firms out of formal credit markets and forcedthem to rely on retained earnings or more expen-sive borrowing from informal sources. Enterprises(in India, for example) have sometimes becomequasi-financial intermediaries themselves becauseformal markets did not serve them adequately.

Once directed credit programs a begun, theycreate a constituency of beneficiaries who do notwant them stopped. This has made it extremelydifficult for governments to reduce their support ofsuch programsregardless of how costly or ineffi-cient governments perceive them to be.

The impact of directed credit programson financial systems

Whatever conclusion is drawn concerning the im-pact of directed credit programs on growth and thedistribution of income, it is clear that they have

59

I

Box 4.4 The Botswana Development Corporation

The Botswana Development Corporation (BDC) wasestablished in April 1970. It is owned by the govern-ment of Botswana, although three foreign agencies, in-

P

cluding the International Finance Corporation, ownnonvoting preference shares. The BDC is not a typicaldevelopment finance institution. It has tried to identifyand establish new projects through wholly owned orjoint-venture subsidiaries, the latter with foreign par-ticipation. The BDC has investments in about sixtycompanies in many sectors, including commercialfarming, tourism, commerce, industry, property devel-opment, financial services, and transportation. Most ofits loans are to its subsidiaries and affiliates. It has alsotried to help local entrepreneurs through its involve-ment in Tswelelo, a development bank for smallenterprises.

The BDC's portfolio is sound. Less than 1 percent ofthe total loan portfolio is in arrears, and only a few ofthe companies in which it has equity holdings areshowing losses. The BDC's financial performance has

been equally strong (except for a small loss in 1985, duemainly to Air Botswana, which has since been divestedinto a separate parastatal). In recent years the BDC'srate of return has averaged 5 percent on net worth.

The BDC has been criticized for not divesting and forcrowding out the private sector. As a result of its recentinitiatives, however, the Sechaba Investment Trust andStock Brokers Botswana Ltd. have been formed as thefirst of their kind in Botswana. The Sechaba Invest-ment Trust will enable the BDC to start privatizingsome of its profitable companies and give citizens anopportunity to invest in private corporations.

The BDC has developed into a mature developmentfinance corporation. It is financially strong, has soundprocedures, and has played a key role in the develop-ment of Botswana's financial system. The BDC owes itsachievements to a strong and growing economy, a con-servative investment and lending strategy, indepen-dent management, and a highly qualified staff.

damaged financial systems. Many directed creditshave become nonperforming loans. The ability toborrow at cheap rates encouraged less productiveinvestment. Those who borrowed for projects withlow financial returns could not repay their loans.In other cases borrowers willingly defaulted be-cause they believed creditors would not take courtaction against those considered to be in prioritysectors. The distorted allocation of resources andthe erosion of financial discipline have left interme-diaries unprofitable and, in many cases, insolvent.Extensive refinance schemes at low interest rateshave reduced the need for intermediaries to mobi-lize resources on their own, leading to a lowerlevel of financial intermediation. Moreover, by en-couraging firms to borrow from banks, directedcredit programs have impeded the development ofcapital markets.

The adverse impact of directed credit on financialinstitutions is clearest in the case of developmentfinance institutions. Industrial DFIs were generallydeemed a success in their early years. Some ofthem have been conservative lenders and havemanaged to avoid excessive political interference;especially in countries with sound trade, fiscal,and monetary policies, they have continued to per-form reasonably well (see Box 4.4). But for mostthe assessment is now far less positive. Portfoliosand financial performance have deteriorated mark-

60

edly; many DFIs are insolvent, and some have hadto be closed. In a sample of eighteen industrialDFIs worldwide, on average nearly 50 percent oftheir loans (by value) were in arrears, and accumu-lated arrears were equivalent to 17 percent of theportfolio value. For three of these institutions,loans accounting for between 70 and 90 percent ofthe portfolio value were in arrears. The situationmay be worse than the numbers show, because therescheduling of overdue loans and growing loanportfolios reduce arrears ratios. Industrial DFIshave continued to depend on governments andforeign official creditors for funding because poorperformance left them unable to pay market ratesof interest, because the term structure of interestrates often forbade the higher rates necessary tomobilize longer-term resources, and because mar-kets for longer-term domestic instruments werepoorly developed.

The economic shocks of the 1980s added to thearrears of many industrial DFIs, but the roots ofthe problem usually lay deeper. Most industrialDFIs specialized in medium- and long-term lend-ing for investment. Such lending was vulnerableto business cycle fluctuations and provided insuffi-cient diversification of risk. Because most indus-trial DFIs did not provide working capital finance,take deposits, or provide other current services,and because they invested in equities to only a

limited extent, they also lacked up-to-date infor-mation on their borrowers. Furthermore, whenweak DFIs diversified into deposit taking, theywere unable to compete with commercial banks.

Multilateral lenders encouraged industrial DFIsto calculate economic as well as financial rates ofreturn. This is undoubtedly useful in distorted en-vironments, but it may have diverted attentionfrom the borrower's overall prospects, manage-ment capabilities, and day-to-day operating deci-sions. Many DFIs have permitted clients to financeinvestments with too little equity. Moreover, be-cause many DFIs relied heavily on foreign re-sources, they had to pass foreign exchange risk onto clients who could neither bear nor hedge it.When currencies were devalued, many firms couldnot repay the loans. Finally, like government-owned commercial banks, government DFIs havehad trouble recruiting and retaining competentstaff because of uncompetitive salaries. Managersappointed for political reasons have often been un-qualified and open to outside pressure in makingloans.

The performance of agricultural DFIs has alsobeen poor. Studies show default rates rangingfrom 30 to 95 percent for subsidized agriculturalcredit programs. Agricultural DFIs have sufferedfrom many of the same problems as industrialDFIs: too much government intervention, over-reliance on governments and official creditors forfunding, inappropriate lending criteria (such ascrop and livestock models that hold little relevancefor the farms under review). In addition, lendingto small farmers is relatively risky and has hightransaction costs, especially if combined with tech-nical assistance. And governments have oftenbeen unwilling to foreclose on small farmers,which has seriously eroded financial discipline.

Housing finance institutions have had problems,and several have been closed, but on the wholethey have fared better than industrial and agricul-tural DFIs. They have had more success in mobiliz-ing resources, although funding in some cases hascome from compulsory savings schemes. The bet-ter housing banks view themselves as householdsector banks and offer a range of services. Theyalso tend to be located in countries with legal sys-tems that make it possible to enforce collateral ar-rangements. Some housing intermediaries, pres-sured to behave like social agencies rather thanbankers, have lent on excessively high loan-to-income or loan-to-value ratios; this has causedlosses and poor recovery from collateral. Wherefixed interest rates were charged on mortgages but

inflation and short-term deposit rates were rising(as in several Latin American countries and in theUnited States in the 1970s), housing banks thatdepended on short-term deposits were badly hurt.Mortgage indexation has provided some protec-tion, but in countries such as Argentina and Brazilindexation was tied to wages; when these declinedin real terms, the banks were left short of income.

Macroeconomic policies and financialdevelopment

In some countries macroeconomic instability hascompounded the difficulties that financial systemsnow face. Macroeconomic conditions in develop-ing countries in the 1980s were the result not onlyof external shocks but also of the developmentstrategies that had been pursued in the 1960s and1970s.

Government borrowing and inflation

By the 1980s many developing countries had cometo rely on foreign borrowing to help finance in-creasing public sector deficits. When the inflow offoreign capital dried up in the early 1980s, somecountries were able to reduce their fiscal deficits.But many were not. They lacked adequate instru-ments of taxation; social and political consider-ations made it hard to cut spending; and most oftheir external debt had been contracted at floatingrates, so that the rise in real interest rates sharplyincreased the cost of servicing that debt.

Central government deficits tell only part of thestory. A more complete definition of the deficit isthe public sector borrowing requirement (PSBR),which in principle consolidates the net borrowingneeds of all public sector entities, including publicenterprises and the central bank. In practice, it of-ten excludes some entities for lack of data. In somecountries the reported PSBR became quite large.For example, in 1984 the PSBR was 15 percent ofGDP in Argentina, 11 percent in Chile, 8 percent inthe Philippines, and 13 percent in Yugoslavia.

PSBR data are unavailable for many countries,but Figure 4.1 shows how central government defi-cits, the narrow measure of public borrowing,were financed in twenty-four developing andeleven high-income countries in 1975-85. The con-trast between the two groups is striking. In thedeveloping countries 47 percent of the deficit wasfinanced by borrowing from the central bank, 15percent by borrowing from domestic financial in-stitutions and markets, and 38 percent by borrow-

61

62

Figure 4.1 Central government borrowingby source, 1975 to 1985

Foreign (38.3 percent)

Other domestic(8.3 percent)

Deposit banks(6.7 percent)

Cent

Developing countries

Other domestic (56.0 percent)

Deposit banks (22.7 percent)

High-income countries

Note: Data are GDP-weighted averages. The developing countrysample consists of Bolivia, Burkina Faso, Burma, Chile, Cyprus,Dominican Republic, Arab Republic of Egypt, Gabon, Indonesia,Republic of Korea, Liberia, Mexico, Morocco, Nepal, Nicaragua,Pakistan, Thailand, Togo, Tunisia, Uruguay, Venezuela, YemenArab Republic, Zaire, and Zimbabwe. The high-income sampleconsists of Australia, Austria, Canada, Finland, France, FederalRepublic of Germany, Italy, Netherlands, Sweden, United King-dom, and United States.

a! bank (46.7 percent)

Foreign (9.7 percent)

Central bank(11.6 percent)

ing from abroad (although foreign financing de-clined from 44 percent in 1975-82 to 26 percent in1983-85). High-income countries, in contrast, re-lied mainly on nonbank financial institutions and

markets to finance their deficits, borrowing lessthan 12 percent of the total from central banks.

The governments of developing countriesturned to their central banks because domestic fi-nancial markets were too shallow to meet theirneeds. To the extent that central banks financedsuch borrowing by issuing money, the result washigher inflation. The average inflation rate in de-velopmg countries increased from 10 percent ayear in 1965-73 to 26 percent in 1974-82 and 51percent in 1983-87. Inflation rates in high-incomecountries also rose in the 1970s but have been heldto less than 5 percent a year in the 1980s. Half of alldeveloping countries continue to enjoy single-digitinflation, but the number of countries with double-and triple-digit inflation has risen in recent years(see Table 4.1). During 1983-87, seven countries(Argentina, Bolivia, Brazil, Nicaragua, Peru, SierraLeone, and Uganda) had average inflation rates ofmore than 100 percent, whereas in 1965-73 nonedid, and between 1974 and 1982 only Argentinadid. Four of the seventeen highly indebted middle-income countries had triple-digit and eleven haddouble-digit inflation during 1983-87, which un-derscores the interrelation of external debt, fiscaldeficits, and inflation. Other factors, such as re-peated devaluations, have added to inflationarypressures, but deficit financing has provided theprimary impetus.

One way or another, the domestic financing oflarge public sector deficits has taxed the financialprocess. Inflation is a tax on certain financial assets(see Box 4.5). Although some governments havesought to reduce the inflationary impact of publicsector borrowing, the measures adopted are, in ef-fect, alternative forms of taxation. Argentina, forexample, set reserve requirements on demand de-posits at more than 70 percent, Brazil at more than40 percent, and Zaire at 51 percent. Reserve re-quirements constitute forced loans to the centralbank, usually at below-market rates. Another ap-proach has been to require banks, insurance com-panies, and other financial institutions to investpart of their funds in low-yielding governmentbonds. India and Pakistan, for example, have usedthis approach to finance large budget deficits atlow cost while maintaining reasonable price stabil-ity (although Pakistan has curtailed the practice inrecent years).

High reserve requirements and forced invest-ments in low-interest government securitiescrowded out private sector borrowing and discour-aged financial intermediation. The implicit tax re-duced intermediaries' profits or was passed alongto depositors and borrowers in the form of lower

Table 4.1 Average annual inflation rates, 1965 to 1987

deposit rates or higher lending rates. Explicit taxeson financial intermediation, as in Turkey and thePhilippines (see Box 4.6), exerted additional up-ward pressure on the spread between deposit andlending rates.

The impact of interest rate policies and inflation

Interest rate controls and inflation have set backfinancial development in many countries. Govern-

ments kept interest rates low partly to encourageinvestment, partly to redistribute income, andpartly because they themselves wished to borrowcheaply. Many governments also believed that lowdeposit rates (the corollary of low lending rates)would not discourage financial saving.

Experience has shown that some of these ideaswere wrong. As Chapter 2 pointed out, there isstrong evidence that real interest rates and infla-tion have a significant effect on financial savings,

Box 4.5 The inflation tax

An economy's willingness to hold money-that is, itsdemand for money-generally grows with its real GNP.Such demand may also change in response to yields onother assets and expectations. If the money issue ex-ceeds the increase in the economy's willingness to holdmoney, the result is inflation, which operates like a tax.Asset holders "pay" the tax by losing purchasingpower on their money holdings. Those who have is-sued money liabilities "collect" the tax in the form of areduction in the real value of their liabilities. To theextent that the money issuer pays interest on theseliabilities, it returns some of the tax to asset holders.Central banks typically do not pay interest sufficient tooffset the tax on their money issue: they pay no intereston currency and usually a below-market interest rateon reserves. Box table 4.5 provides estimates of theinflation tax (as a share of GNP) flowing to the centralbank on reserve money for ten countries in 1987.

It might seem that a high inflation rate implies a highinflation tax as a percentage of GNP, but this is notalways so. High inflation rates (that is, high rates ofinflation tax) discourage people from holding money.When the money stock held by the economy is a smallpercentage of GNP, the inflation tax will be corre-spondingly small. Hence, if inflation has been high andthe money stock-the tax base-has declined as a per-

centage of GNP, the central bank must issue a largeramount of money and generate a higher inflation rateto secure a given amount of revenue.

Box table 4.5 The inflation tax in selectedcountries, 1987

Note: The inflation tax is defined as the decline in the purchasingpower of average reserve money (IFS, line 14) due to inflation. It iscalculated as M x [i 1(1 + i)]. where M is the average reserve moneyat year-end and year-beginning and i is the decimal inflation ratemeasured by the change in the CPI from December to December.[Over any interval for which the prices rise by i, each money unitloses iI (1 + i) of its purchasing power.[Source: IMF, International Financial Statistics, and World Bank data.

63

(percent)

Item 1965-73 1974 -82 1983-87

High-income countries 5 9 4Developing countries 10 26 51

China and India 3 4 7Other low-income 20 16 13Highly indebted countries 14 45 120Other middle-income 6 15 12

Number of developing countrieswith inflation rates in excess of

20 percent 4 15 2730 percent 2 9 17

100 percent 0 1 7

Country

Inflation tax(percentageof GNP)

Reserve money(percentage

of GNP)

Inflationrate

(percent)

Argentina 4.0 6.3 174.8Côted'Ivoire 0.5 14.4 3.4Ecuador 2.0 8.1 32.5Ghana 2.0 7.9 34.2Mexico 3.7 6.0 159.2Nigeria 0.9 9.6 9.7Peru 4.8 9.1 114.5Philippines 0.6 8.0 7.5Turkey 2.8 7.9 55.1Zaire 4.2 8.2 106.5

Note: The average annual rate of inflation is measured by the growth rate of the GDP implicit deflator. Aggregates for country groups are GDP-weighted averages. Data for developing countries are based on a sample of eighty-eight countries.

I

Box 4.6 Taxation of financial intermediation in the Philippines

Like many countries, the Philippines collects specialtaxes from financial institutions. The most important ofthese are the gross receipts tax (GRT) and the implicittax on reserve requirements.

The GRT is imposed on all receipts (income and capi-tal gains) of a bank. Formerly applied at a uniform rate,it is now imposed on a sliding scale, with a rate of 5percent for instruments with maturities of less thantwo years. Lower rates apply to longer maturities, withthose of more than seven years free of tax. The implicittax on reserve requirements arises because these areremunerated at 4 percent, which is much lower thanmarket interest rates. Reserve requirements have var-ied but have for several years been more than 20 per-cent of bank deposit liabilities (except for long-termdeposits of more than two years, which attract a muchlower rate).

The impact of these taxes increased markedly during1983-85. Major devaluations and an acceleration of in-flation led to a sharp increase in interest rates as theauthorities acted to restore stability. By the end of 1984,with money market rates at around 35 percent (com-pared with inflation of only 5 percent over the follow-ing twelve months), a bank would have had to earn

more than 47 percent on a short-term loan simply toservice money market borrowings, in view of the re-serve requirements and the GRT. In other words, atthe margin these taxes added more than 12 percentagepoints to the cost of intermediation. In fact, bank lend-ing rates and spreads were held down by the weaknessof demand for loans and the banks' continued access tofunds from depositors at lower interest rates. Never-theless, the combined burden of the GRT and the im-plicit tax on reserve requirements in 1984 exceeded 150percent of value added in the banking system. Theimpact of the taxes has since come down with the de-cline in interest rates.

A withholding tax on deposit interest income, whichis levied at the rate of 20 percent, also imposes somedistortions. Although a credit against income tax, it isnot refundable if the computed income tax liability fallsbelow the amount of the tax already withheld. A fur-ther imposition is the lending requirement for agrarianreformlO percent of banks' net loanable fundswhich virtually all banks satisfy by investing in eligiblegovernment securities. Although these securities nowcarry market interest rates, this was not the case untilrecently.

and various studies have found that financial sav-ings and the rate at which these are lent are posi-tively related to economic growth.

Figure 4.2 compares real interest rates in thirty-five developing countries (as a group and by re-gion) with the U.S. Treasury bill rate between 1967and 1985. Except for a brief period after the first oilshock, real interest rates were much lower in thedeveloping countriesand substantially negativefor much of the period. Within the sample, aver-age real rates were almost consistently negative inAfrica, Europe, and Latin America. In Asia, how-ever, average real rates were positive in most years.

Negative real interest rates were sometimes theresult of deliberate policy, but sometimes theywere inadvertent, a consequence of governments'failure to modify administered rates to compensatefor rising inflation. Even in the absence of govern-ment regulation, the level of real interest rates hasbeen highly sensitive to inflation because of lags inthe adjustment of nominal rates. In Argentina, Is-rael, and Uruguay in the 1980s, volatile inflationcaused sharp fluctuations in real rates.

Because of this link between inflation and realinterest rates, macroeconomic stability is vital forfinancial sector development. In countries that

64

have maintained low and stable inflation throughprudent monetary and fiscal policies, financial sec-tor growth has been rapid, even where interestrates were (moderately) regulated. The financialsectors of Japan and Malaysia have grown rapidlyduring the past three decades, thanks largely toprice stability. Malaysia's financial depth, as mea-sured by the ratio of M2 to GNP, rose from 31percent in 1970 to 75 percent in 1987. Thailand'sfinancial sector has grown rapidly since inflationwas brought down; using the same measure, fi-nancial depth grew from 34 percent in 1980 to 60percent in 1987, as real interest rates became posi-tive. In contrast, Argentina has long suffered fromhigh and variable inflation; its financial depth,which exceeded 50 percent of GNP in the late1920s, had declined to around 30 percent of GNPby 1970 and to 18 percent by 1987 (see Figure 4.3).Other high-inflation countries, such as Bolivia andYugoslavia, have also experienced slow or negativegrowth in financial depth.

In the 1970s the problem was low real interestrates. In the 1980s, however, some countries haveexperienced high real interest rates. Althoughmost developing countries still place restrictionson interest rates, there has been a trend toward

Figure 4.2 Real interest rates in developing countries and the United States, 1967 to 1985

Percent

12

8

20

deregulation. Some countries with unstable mac-roeconomic conditions and distressed banks andborrowers have seen real interest rates on nonpref-erential credit rise to high levels (see Table 4.2).Real rates have also been high in some economi-cally stable countries that administered rates, (forexample, Korea and Thailand) because of a declinein inflation and strong loan demand. Althoughmoderately positive real interest rates are desir-able, extremely high real rates are not. They cancause distress among borrowers (see Chapter 5)and swell fiscal deficits. Chapter 9 returns to thedifficulties confronting governments that intend toliberalize their financial systems.

Interest rate controls and inflation have hadother adverse consequences as well. As notedabove, artificially low interest rates cause excess

U.S. Treasury bill

demand for credit and force financial institutionsto ration their lendingwhich may favor borrow-ers who need the money least. By preventing fi-nancial institutions from charging higher interestrates on longer-term and riskier loans, govern-ments' interest rate policies have discouraged thevery sort of lending they sought to foster. Togetherwith directed credit programs, they have also dis-couraged competition. The combination of infla-tion and low deposit rates has led to capital out-flows and thereby reduced the resources availablefor relending by financial intermediaries. The de-velopment of unofficial (curb) markets, however,has alleviated some of the adverse consequences ofinterest rate and other controls (see Box 4.7).

Inflation, by causing uncertainty and instabilityin relative prices, makes longer-term investments

65

1967 1970 1973 [976 1979 1982 1985

Note: Data are unweighted averages based on a sample of thirty-five low- and middle-income countries, eight of them in Europe, MiddleEast, and North Africa and nine in each of Sub-Saharan Africa, Asia, and Latin America and the Caribbean.a. Average for the sample of thirty-five developing countries.Source: Geib (background paper) and IMF, International Financial Statistics.

66

Figure 4.3 Financial savings and the real deposit rate in Argentina and Thailand, 1970 to 1987

Percent45

40

35

30

25

20

15

10

5

0

Argentina

Average real depositrate (right scale)

/Financial savings as a shareof GNP (left scale)

1970 1973 1976 1979 1982

Note: Financial savings are M2 (currency in circulation plus demand, time, and savings deposits at banks) and are five-quarter averages.Source: Gelb (background paper); IMF, International Financial Statistics; Easterly 1989; central bank bulletins; and World Bank data.

riskier and more difficult to finance. It also makesthe future purchasing power of financial contractsless certain. Even when interest rates are not regu-lated, uncertainty about future inflation makes ithard for lenders and borrowers to agree upon anappropriate fixed nominal interest rate. The lenderrisks inflation turning out higher than expected,the borrower risks inflation turning out lower thanexpected. The higher and more variable the infla-tion and the longer the time horizon, the greaterthe risks. In countries such as Argentina loans ofmore than thirty days became unusual.

Several countries that have had chronic inflation,

Table 4.2 Real loan interest rates for selected countries, 1980 to 1986

1985 1987 1970

Thailand

Financial savings as a shareof GNP (left scale)

-

W Average real depositrate scale) -(right

1973 1976 1979 1982

including Brazil, Chile, Colombia, and Israel, haveauthorized the use of indexed financial contracts.Indexation links the value of the financial contractto a price index. If indexation is complete, if theindex accurately reflects prices, and if adjustmentis immediate, indexation denominates the contractin terms of purchasing power rather than money.At high inflation rates, private sector borrowersoften find it too risky to take on purchasing powerobligations, because they fear their income will failto keep pace. The public sector, in contrast, doesnot have this problem. It cannot go bankrupt in itsdomestic markets as long as it has the power to

Percent

20

15

10

5

0

-5

-10

-151985 1987

Note: Real interest rates were calculated from nominal rates according to the following formula: [(1 + r) / (1 + p) - 1] x 100, where r is the interestrate and p is the inflation rate.Source: Easterly 1989.

(percent)

Country 1980 1981 1982 1983 1984 1985 1986

Argentina 5.1 31.2 -18.7 -22.9 -29.7 -6.3 3.9Brazil -2.5 4.9 26.2 0.2 7.5 -0.1 -0.1Chile 12.1 38.8 35.7 15.9 11.5 11.1 7.5Colombia 14.1 11.8Indonesia 10.9 9.9 16.4 17.4 13.1Korea, Rep. of -12.3 5.1 6.6 7.9 7.4 6.6 8.6Philippines 4.2 8.9 -5.4 -15.0 21.7 17.9Thailand 1.4 5.9 16.0 13.3 19.2 15.2 15.1Turkey -0.6 50.2 37.7 28.0 28.7 42.0 51.0

Percent Percent

20 70

0 60

50-20

40

-4030

- -6020

-80 10

IBox 4.7 The curb market

In many developing countries, economic regulation(often in the form of interest rate controls) has led tothe growth of an unregulated curb market, which canbe an important source of funds for both business andhouseholds. In the Republic of Korea, it has been esti-mated that the outstanding obligations in the curb mar-ket in 1964 were roughly equal to 70 percent of thevolume of loans outstanding from commercial banks.By 1972 the ratio had been reduced to about 30 percent,largely as a result of interest rate reforms in the formalsector in the mid-1960s. After the monetary authoritiesreduced interest rates in the late 1970s, there was aresurgence in the market. But the market has recentlydeclined again. Business shifted from the curb marketto nonbank institutions that were allowed to offer sub-stantially higher returns.

According to one survey, about 26 percent of firmsborrowed from the curb market, which supplied about20 percent of their total borrowing. About 70 to 80 per-cent of credit from the curb market to small andmedium-size firms was extended without collateral.But the curb market uses a sophisticated credit ratingsystem, and prime companies pay an interest rate sub-stantially lower than less creditworthy ones. The aver-

age annual interest rate on curb loans was 24.0 percentin 1985, when the general bank loan rate was 10. 0-11.5percent.

The curb market has been closely integrated with theformal market. According to one popular method oftransaction, an informal lender makes a savings de-posit at a bank branch, which then extends a loan to aborrower designated by the depositor. The informallender thereby earns the savings deposit rate plusabout 1 percent a month from the borrower, withoutany risk of default.

The curb market has been a significant part of thefinancial system in other countries as well. In Argen-tina, for example, the reimposition of interest rate con-trols and financial repression after 1982 led to the rapidexpansion of the curb market. According to one esti-mate, informal credit from the curb market representednearly a quarter of the total granted by commercialbanks and finance companies in 1984.

Experience shows that the curb market becomes ac-tive when the formal financial sector is heavily regu-lated and interest rates are held below market levels.The curb market is effectively an unregulated billsmarket.

print money. Thus at high rates of inflation, mostindexed contracts are issued or backed by the gov-ernment or by public entities. Indexing financialinstruments can be useful in inducing lenders andborrowers to make longer-term commitments atsome middle range of inflation, say 10 to 40 per-cent a year, but it is no substitute for controllinginflation. If unaccompanied by adequate stabiliza-tion measures, indexation tends to make inflationworse (see Box 4.8).

As an alternative to indexing, some countries,including Turkey, Uruguay, and Yugoslavia, haveadopted foreign currency deposit schemes. In ef-fect, these index deposits to the exchange rate.Such schemes have increased the flow of savingsinto the financial system. But they can also compli-cate monetary management. Since the domesticvalue of the foreign exchange deposits rises auto-matically with currency devaluation, the monetaryaggregates tend to accommodate inflationary pres-sures. To the extent that loans extended againstforeign exchange deposits are denominated in do-mestic currency, the banks lose with each devalua-tion if the interest rate differential is insufficient tocover the change in currency values. This puts

pressure on the central bank to provide accommo-dation. In Yugoslavia, for example, central banklosses on the foreign currency deposit schemehave added to inflationary pressures.

Exchange rate policies and financial development

During the 1970s many developing countries al-lowed their exchange rates to appreciate in realterms. This was made possible by relatively favora-ble terms of trade and by the availability of foreignloans to finance the resulting current account defi-cits. The real appreciation of the exchange rate fa-vored production of nontraded over traded goodsand encouraged reliance on imported inputs. Fi-nancial institutions accordingly allocated a largershare of credit to firms in the nontraded goodssector, as Figure 4.4 illustrates in the case ofColombia.

Overvalued exchange rates and controlled inter-est rates combined to stimulate capital outflows.These flows were illegal in countries with foreignexchange controls, but such controls have rarelybeen effective. Although capital flight is hard tomeasure, the discrepancies between increases in

67

I

I

Box 4.8 Financial indexation in Brazil

By 1964 Brazil's inflation rate had risen to 100 percent ayear. A new government took office in April 1964 deter-mined to stabilize the economy. It felt unable to cut thedeficit immediately, but wanted to finance it with non-inflationary debt sales in domestic financial markets.This was impossible because exorbitant real interestrates would have been needed to compensate bond-holders for bearing the inflation risk. In 1965, there-fore, the government issued an indexed Treasurybond-a bond whose principal and interest would beadjusted periodically in line with the inflation rate. Thegovernment also encouraged the indexation of otherfinancial instruments, including savings accounts andcorporate debentures.

The experiment had mixed results. Indexation un-doubtedly succeeded in increasing the flow of savingsthrough the financial system and to the government(see Box table 4.8). Corporations, however, remainedreluctant to issue indexed debentures because theywere unsure whether the returns on their assets couldkeep pace with index-linked obligations. There was asimilar problem in the housing market. Most mort-gages could not be fully index-linked because wagesgenerally lagged behind inflation. Borrowers' monthlypayments were therefore linked to wages, which wereusually adjusted once a year, and their outstandingmortgage balances were indexed to prices. The hous-ing finance system grew rapidly through the late 1960sand 1970s. But when inflation once again reached the

Box table 4.8 Key financial instruments, selected years, 1965 to 1985(percentage of GDP)

Year Ml

Nonindexed

Note: 11980 was an anomalous year because a limit was placed on financial indexationSource: For 1965-79, Goldsmith 1986; for 1985, based on central bank data.

triple-digit level in the 1980s, the system faced severeliquidity problems because liabilities and assets rosemuch faster than wage-linked income cash flow. More-over, when prices accelerated, asset holders tended toswitch their portfolios from money-denominated in-struments to indexed instruments. This created sharpliquidity pressures for commercial banks and short-term financial markets, from which asset holders with-drew resources, as well as for housing finance interme-diaries, which had difficulty coping with large andoften temporary resource inflows.

The government succeeded in financing more of itsdeficit with indexed bonds. In the 1980s, however, thereal stock of indexed bonds increased-in part, becausemost bonds carried an exchange rate clause and in Feb-ruary 1983 there was a sharp real devaluation, but alsobecause the public sector's borrowing needs rose mark-edly. Inflation accelerated and the debt servicing re-quirements on the indexed bonds added significantlyto the public sector borrowing requirement. As part ofits 1986 Cruzado Plan, the government suspendedmost forms of financial indexation, hoping to relievethe "inflation-feedback" spiral that indexation seemedto be causing. When the Cruzado Plan failed and infla-tion revived toward the end of 1986, nominal interestrates surged. The government found itself in the sameposition as in the mid-1960s. It again began to issueindex-linked bonds.

Time andsavings

Total deposits

Indexed

Treasury,state, and Realmunicipal estate

bonds bonds Total

I

external debt and the uses of finance recorded inthe balance of payments accounts-especially formany Latin American countries in the early1980s-point to massive capital flight. Capital out-flows are not an exclusively Latin American phe-nomenon, of course. There have been capital out-flows from member countries of the West African

68

Monetary Union, which have few restrictions oncapital transfers. Thailand, which also had rela-tively liberal policies toward capital movements,experienced capital outflows when U.S. interestrates increased sharply in the early 1980s; theseoutflows stopped when domestic interest rateswere adjusted accordingly.

1965 17.2 1.3 - 18.5 0.6 0.9 0.0 1.51970 14.6 3.4 0.3 18.3 2.8 4.4 0.8 8.01975 13.5 4.2 2.8 20.5 8.3 5.5 0.7 14.51979 9.3 2.1 3.0 14.4 10.3 3.7 0.1 14.11985 3.9 1.3 0.3 5.5 13.6 9.1 0.0 22.7

Exchange Treasuryacceptances hills

The task of financial reform

At the onset of industrialization in the developingcountries, financial markets were inadequate tomeet the demands placed upon them. This justi-fied some form of government intervention. Butextensive directed credit programs at subsidizedinterest rates proved an inefficient way to over-come market failures and redistribute income.Macroeconomic instability, combined with creditand interest rate controls, made matters worse.Most governments neglected to address the under-lying weaknesses of their financial systems. Thisinattention to the conditions necessary for finan-cial development did not significantly impedegrowth during the 1970s. Favorable terms of tradeand cheap foreign funding enabled developingcountries to finance growing investment expendi-tures despite the small size of their financial sys-tems. But as events of the 1980s demonstrated,financial institutions were left weak and vulnerableto change.

In the early 1980s most developing countriesconfronted deteriorating terms of trade, falling ex-port volumes, rising international interest rates,and a sudden curtailment of foreign lending.Many countries no longer had the foreign ex-change to finance large current account deficits orthe fiscal resources to continue subsidizing ineffi-cient industries. In countries that were forced todevalue to discourage imports and stimulate ex-ports, firms in the nontraded goods sector becameless profitable, and the debt service obligations ofenterprises that had borrowed in foreign currencyincreased. Fewer and more expensive imports hurtcompany profitability, as did the collapse in de-mand in the countries that adjusted to the shocksby tightening their monetary and fiscal policies.Many firms were unable to service their debts.Other aspects of trade adjustment, such as lowerimport restrictions or tariffs, had similar effects:they reduced the profitability of previously pro-tected enterprises and added to the nonperform-ing assets of financial institutions. In turn, manyfinancial intermediaries became insolvent.

Now, more than ever, developing countries needto rely on domestic resources to finance develop-ment. The importance of sound macroeconomicpolicies for building efficient financial systems can-not be overemphasized. Large public sector defi-cits that demand financing from shallow domesticfinancial systems invariably lead to inflation orcrowd out private sector borrowing. The interac-tion of high and unstable inflation and rigidly ad-

Figure 4.4 Prices, production, and bank creditin Colombia

Relative prices and production,1975 to 1983

Index(1975= 100)

130

120 Ratio of tradables pricesto nontradables prices

110

100

74

90

Percent77

71

68

65

Ratio of nontradablesproduction to tradablesproduction

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Share of nontradables in total bank credit,1975 to 1984

1975 1976 1977 1978 1979 1980 1981 1982 1983 1984

Source: Hinds 1988.

ministered interest rates is certain to cause finan-cial disintermediation, and to do much othereconomic harm besides.

Granting that sound macroeconomic policy is es-sential, financial sector reform can make an impor-tant contribution to development. Chapters 5through 9 will examine different aspects of the taskof building better financial systems in developingcountries. Chapter 5 begins by looking in moredetail at the distress of financial institutions andthe first steps to be taken in reshaping financialsystems.

69

5 Financial systems in distress

Not since the 1930s have so many firms in develop-ing countries been unable to service their debts.Their difficulties are rooted in the internationalshocks of the 1980s and their domestic aftermathand in the policies that governments have pursuedover the past thirty years. The inability of firms toservice debt has caused distress for many financialinstitutions. In some countries incipient financialcrises forced the government to assist troubledbanks. In others, although there has been no crisis,banks' losses are large enough to require govern-ment intervention. Failure to take action is costly.With delay, losses mount and so does the cost ofrestructuring. In all, more than twenty-five gov-ernments have helped distressed financial institu-tions during the past decade. Much has beenlearned from these measures.

In 1981 the Chilean government liquidated threecommercial banks, four finance companies, and adevelopment bank. Together these accounted formore than one-third of all loans made by the finan-cial system. Fourteen months later the authoritiesintervened again. They placed eight institutions,which accounted for nearly half of all loans, undercentral bank management and extended financialsupport to all but one of the remaining commercialbanks.

In the United States more than 1,000 savings andloan associations (S&Ls) were closed or mergedwith sounder institutions between 1980 and 1988.

70

By early 1989, 600 S&Ls, or one-fifth of all S&Ls,were still thought to be insolvent, and the loss tothe S&L deposit insurance fund was expected tototal at least $120 billion. Among commercialbanks the failure rate rose from ten a year duringthe 1970s to more than 150 a year in the late 1980s.In early 1989 about 10 percent of commercial bankswere on the regulators' "watch list."

Cases like these are spectacular, but much finan-cial distress remains hidden. Because intermedi-aries have rolled over unpaid loans and have capi-talized unpaid interest, their insolvency is notapparent from their accounts. Accounting infor-mation may be kept confidential, and what is avail-able is often unreliable. Where audits have beenmade using generally accepted accounting princi-ples, nonperforming loans have proved to be sub-stantial. In nearly all instances of government in-tervention, intermediaries' actual losses haveproved to be far larger than reported. The numberof bad and doubtful loans in the portfolios of manyinstitutions is such that expected losses exceed thesum of capital, reserves, and loss provisions; theseinstitutions are technically insolvent.

If reliable information were available, countriescould be ranked according to the share of nonper-forming loans in banks' total assets. At one end ofthe range would be countries in which nearly allintermediaries are profitable and solvent and non-performing loans amount to only 1 or 2 percent of

assets. At the other would be countries in which 20percent or more of all loans are nonperforming andmany, if not most, banks are insolvent (some hav-ing losses equal to many times their capital). Al-though lack of data makes it impossible to measurefinancial distress precisely, it is clear that distress iswidespread. Box 5.1 presents information for a se-lect group of countries. This information may over-state the severity of distress in some countries andunderstate it for others.

In most cases banks are not illiquid (that is, theycan still meet payment demands), but so many of

their debtors are unable or unwilling to servicetheir loans that the banks are making losses. Thefailure of some borrowers to service loans is com-mon; even healthy banks expect to have somenonperforming loans. But losses large enough toimpair the profitability and solvency of so manyinstitutions in so many countries are unprece-dented. Even during the depression of the 1930s,very few large banks in developing countriesfailed.

That banks remain open and continue to acceptdeposits and make loans does not mean that they

Box 5.1 Examples of financial distress

Argentina. The failure of a large private bank sparkedthe 1980-82 banking crisis. By 1983, 71 of 470 financialinstitutions had been liquidated. The restructuringprocess is not yet complete.

Bangladesh. Four banks that accounted for 70 percentof total credit had an estimated 20 percent of nonper-forming assets in 1987. Loans to two loss-making pub-lic enterprises amounted to fourteen times the banks'total capital.

Bolivia. In late 1987 the central bank liquidated two oftwelve private commercial banks; seven more reportedlarge losses. In mid-1988 reported arrears stood at 92percent of commercial banks' net worth.

Chile. In 1981 the government liquidated eight insol-vent institutions that together held 35 percent of totalfinancial system assets. In 1983 another eight institu-tions (45 percent of system assets) were taken over:three were liquidated, five restructured and recapital-ized. In September 1988, central bank holdings of badcommercial bank loans amounted to nearly 19 percentof GNP.

Colombia. The 1985 losses of the banking system as awhole amounted to 140 percent of capital plus re-serves. Between 1982 and 1987 the central bank inter-vened in six banks (24 percent of system assets), five ofwhich in 1985 alone had losses equal to 202 percent oftheir capital plus reserves.

Costa Rica. Public banks, which do 90 percent of alllending, considered 32 percent of loans "uncollectible"in early 1987. This implied losses of at least twice capi-tal plus reserves. Losses of private banks were an esti-mated 21 percent of capital plus reserves.

Egypt. In early 1980 the government felt compelled toclose several large Islamic investment companies.

Ghana. By mid-1988 the net worth of the bankingsystem was negative, having been completely erodedby large foreign exchange losses and a high proportionof nonperforming loans. The estimated cost of restruc-turing is $300 million, or nearly 6 percent of GNP.

Greece. Nonperforming loans to ailing industrial corn-

panies amount to several times the capital of the largestcommercial banks, which hold more than 80 percent oftotal bank assets.

Guinea. The government that assumed power in 1984inherited a virtually defunct banking system: 99 per-cent of loans proved irrecoverable. All six state-ownedbanks were liquidated, and three new commercialbanks were established, each with foreign participa-tion.

Kenya. Many of the nonbank financial institutionsthat have sprung up since 1978 are insolvent, and in1986 several of the larger ones collapsed.

Korea. Seventy-eight insolvent firms, whose com-bined debts exceeded assets by $5.9 billion, were dis-solved or merged during 1986 and 1987. In addition,the central bank lowered interest rates on its redis-counts to commercial banks on loans to troubledindustries.

Kuwait. Because of large losses sustained by specula-tors in stock and real estate markets, an estimated 40percent of bank loans were nonperforming by 1986.The government has supported banks by providinghighly concessional loans.

Madagascar. In early 1988, 25 percent of all loans wereirrecoverable, and 21 percent more were deemed "dif-ficult to collect." Given the low level of reserves (lessthan 5 percent of assets), the banking system as awhole was insolvent.

Malaysia. The 1986 failure of a deposit-taking cooper-ative (DTC) that held only 0.2 percent of the bankingsystem's total deposits led to runs on other DTCs.Twenty-four DTCs (2.1 percent of total deposits) werejudged insolvent, and all twenty-four were rescued.Three ailing commercial banks, with 5.2 percent of totaldeposits, were recapitalized during 1985-86.

Nepal. In early 1988 the reported arrears of threebanks (95 percent of the financial system) averaged 29percent of all assets.

Norway. Commercial and savings banks sufferedheavy losses in 1987 and 1988 owing to the collapse of

71

Box 5.1 (continued)

the price of oil and to imprudent lending. The authori-ties replaced the management and board of a leadingbank and forced banks to write off bad loans, restruc-ture their operations, raise new capital, and mergewith other institutions.

Pakistan. Under old regulations, which allowed in-definite accrual of income regardless of loan classifica-tion, the capital-to-assets ratios of five large banks (90percent of the banking system) averaged 3 percent. Un-der new regulations the banks must make a major re-capitalization effort to reach a similar ratio.

Philippines. Between 1981 and 1987, 161 smaller insti-tutions holding 3.5 percent of total financial systemassets were closed. In addition, the authorities inter-vened in two large public and five private banks. Thepublic banks were liquidated in 1986, and their largestbad assets (equal to 30 percent of the banking system'sassets) were transferred to a separate agency. The fiveprivate banks are still under central bank supervision.

Spain. Between 1978 and 1983 fifty-one institutionsholding nearly a fifth of all deposits were rescued; twowere eventually liquidated, and the rest were sold tosound banks.

Sri Lanka. Two state-owned banks comprising 70 per-cent of the banking system have estimated nonper-forming assets of at least 35 percent of their total port-folios.

Tanzania. In early 1987 the main financial institutionshad long-standing arrears amounting to half their port-folio, and implied losses were nearly 10 percent ofGNP.

Thailand. The resolution of a 1983 crisis involving

forty-four finance companies that held 12 percent offinancial system assets cost $190 million, or 0.5 percentof GNP. Between 1984 and 1987 the government inter-vened in five banks that held one-quarter of bank as-sets.

Turkey. A financial crisis erupted in 1982 with thecollapse of several brokers, and five banks were res-cued at a cost equal to 2.5 percent of GNP. Since 1985two large banks have been restructured, but more mayneed to be done. Banks' reported losses are 6 percent.According to some estimates, losses exceed 10 percent.

UMOA countries.' More than 25 percent of bankcredits in the UMOA countries are nonperforming. Atleast twenty primary banks are bankrupt: nonperform-ing credits are almost six times the sum of their capital,reserves, and provisions.

United States. Between 1980 and 1988 nearly 1,100savings and loan associations (S&Ls) were closed ormerged. In early 1989, more than 600 (one-fifth of allS&Ls) were insolvent, and the cost of restructuringwas estimated to be roughly $80 billion in terms ofpresent value. By 1989, 10 percent of commercial bankswere on the regulators' "watch list."

Uruguay. After several banks failed in 1981-82, thecentral bank began to aid banks by purchasing theirworst assets; by 1983 it had acquired $830 million inbad loans. The potential cost of recapitalizing the bankshas been estimated at $350 million, or 7 percent ofGNP.

1. The Union Monétaire Ouest Africaine (UMOA), or West AfricanMonetary Union, comprises Benin, Burkina Faso, Côte d'lvoire,Mali, Niger, Senegal, and Togo.

are solvent or that their insolvency has no eco-nomic costonly that they remain liquid (see Box5.2). It is possible for banks in one country to havelarger losses than banks in another and still bemore liquid. Thus waiting for banks to become il-liquid before taking action can be costly. Indeed, incountries where government help has enabled in-solvent banks to stay open, the cumulative costs ofdistress may well be higher than in countrieswhere the authorities have closed or restructuredinsolvent banks.

Bank restructuring is not an end in itself. Banks'losses reflect the difficulties of firms in other sec-tors, and these difficulties are a result not only ofexternal shocks and subsequent policy changes butalso of the development strategies pursued bymany countries. Resolving firms' problems andchanging the policies that gave rise to them mayprove more difficult than restructuring loss-

72

making banks, partly because of employment con-siderations. Although it is recognized that insol-vency among financial institutions has deepercauses elsewhere, this chapter focuses mainly onbanks' portfolio problemstheir consequences,causes, and cures.

Economic consequences of financial distress

Weakened by large losses, many financial institu-tions in developing countries have become lessable to provide the services described in Chapter 2.Their diminished capacity to improve the alloca-tion of resources has contributed to slow growthand has undermined some countries' attempts atstructural adjustment. Where governments havechosen to delay the restructuring of troubled firmsand intermediaries, the high recurrent costs of as-sistance have compromised efforts to tighten mon-

etary and fiscal policy and in some cases have ledto further macroeconomic instability.

Resource misallocation

The rising proportion of nonperforming loans haslimited the volume of credit that banks can extendto new clients. Moreover, credit allocation has of-ten become perverse, with banks extending morerather than fewer loans to their least solvent cli-ents, especially to large borrowers. New loans totroubled firms might have been justified if theloans had been used to restructure the ailing enter-prises or if the firms had not been insolvent butmerely illiquid. But much new lending has simplyfinanced the servicing of prior loans or prolongedthe lives of nonviable firms. By channeling addi-tional funds to borrowers unable to make profit-able use of the resources already at their disposal,lenders have delayed the process of adjustment.

Credit misallocation caused by financial distresshas been more pronounced in some countries thanin others. In some countries losses built up gradu-ally as banks, complying with government direc-tives, continued to lend to unprofitable sectors. Inother countries, however, loan portfolios deterio-rated rapidly, especially in the highly indebtedcountries following the shocks of the early 1980s.With a large proportion of their clients suddenly indifficulty, bankers had to extend additional creditto their most troubled borrowers to stave off theirown bankruptcy. Thus borrowers took on newdebt to service old debt, domestic as well as for-eign. In countries that experienced acute financialdistress, a growing share of credit has gone towarddebt service instead of investment. Figure 5.1shows that, in a select group of countries, the ratioof new credit to investment rose after 1980.

Widespread distress increases the demand forcredit and therefore exerts upward pressure onreal interest rates. During the 1980s real interestrates in several developing countries have oftenbeen extremely high, far exceeding the return oninvestment. Although various explanations forhigh real interest rates have been offered (includ-ing expected devaluation, unexpectedly low infla-tion, tight monetary policies, heavy public sectorborrowing, and the reduced availability of foreignsavings), the main reason firms were willing toborrow at real interest rates much higher than theirreturn on capital was to avoid bankruptcy. Thecountries in which real lending rates have beenhighest (Argentina, Chile, Colombia, Costa Rica,Turkey, and Uruguay) are all countries in which

firms and intermediaries have been under greatfinancial stress.

The use of new lending to cover interest pay-ments, together with the high real interest rates insome countries, has inhibited investment and thusproduction. Gross investment in developing coun-tries fell from an average of 25.1 percent of GNP in1978 to 21.7 percent in 1986. The decline has beenparticularly steep in the seventeen highly indebtedcountries, where gross investment fell during thesame period from 25.0 percent of GNP to 17.5 per-cent, a level barely adequate to maintain the exist-ing stock of capital. Although reduced aggregatedemand and increased macroeconomic instabilityare the principal causes of the decline in invest-ment, domestic financial distress has been a con-tributing factor.

The financial system's reduced ability to directcredit toward profitable borrowers has under-

73

r Box 5.2 Bank solvency and liquidity

A bank is solvent if the value of its assets is greaterthan the value of its liabilities to depositors andother creditors; "net worth" is the amount bywhich assets exceed liabilities. The larger a bank'snet worth, the larger its cushion against insol-vencythat is, the larger the fall in asset valuesthat the bank can sustain and still be solvent.Bank supervisors try to ensure that banks have

I

adequate capital, which is often defined as someminimum fraction of total or risk assets. If therequired capital-to-assets ratio is 5 percent, for ex-ample, a bank with $100 million in assets and $98million in liabilities (hence a net worth of $2 mil-lion) would be instructed to find $3 million of ad-ditional capital to bring net worth up to $5 million.Many banks in developing countries are insolvent

I

and unable to earn the large sums needed to re-gain solvency; the negative net worth of some ofthese banks is many times their capital.

A bank is liquid as long as it can meet day-to-day operating expenses and withdrawals. Becauseit is highly leveraged, a bank can remain liquidlong after becoming insolvent. That some coun-tries have not experienced runs does not signifythat their banks are sounder than banks in coun-tries where runs did occur but merely that theyare more liquid. Public ownership of banks, im-plicit or explicit deposit guarantees, periodic pro-vision of liquidity to weak banks, and macro-economic stability make depositors less likely towithdraw funds from insolvent banks and therebyhelp those banks to remain liquid. j

74

Figure 5.1 Ratio of new credit to investmentin selected developing countries, 1973 to 1979and 1980 to 1986

Colombia

Costa Rica

Turkey

Yugoslavia

1973-79

1980 86

0 50 100 150 200 250

Percent

Note: New credit is the change in the stock of outstanding creditto the nonfinancial sector. Investment is gross fixed capital for-mation.Source: IMF, International Financial Statistics, and World Bankdata.

mined some countries' efforts at structural reform.Successful adjustment largely depends on the re-lease of resources from less productive uses andtheir redeployment to more productive firms. Con-tinued lending to unprofitable firms has impededthis flow. As a result the resources needed to fi-nance investments made profitable by policychanges, such as devaluations and tariff reduc-tions, have not been available. This has delayedrecovery from recession in the short run and, bymisdirecting resources that could be used for in-vestment, has slowed future growth.

Macroeconomic consequences of financial distress

In the nineteenth century, before the advent of de-posit insurance and official lenders of last resort,financial distress was usually deflationary. Rumorsof bank insolvency precipitated bank runs, whichforced even solvent banks to call in loans. Thisresulted in a contraction of the money supply anda corresponding fall in economic activity. Todaycentral banks in developing countries are wellversed in providing liquidity to the financial sys-

tem. They have succeeded in stemming incipientruns on banks, as in Chile in 1983 and Malaysia in1986. Occasionally deposits have shifted suddenlyfrom one class of intermediary to another per-ceived as safer. In Argentina in 1980 depositorsmoved their holdings from domestic privatebanks, several of which had failed, to state- orforeign-owned banks. Such shifts created difficul-ties for the deposit-losing institutions, but themonetary authorities had the means to avoid sharpdeclines in total liquidity.

The existence of a lender of last resort has en-abled countries to avert banking panics, but thefinancial distress of recent years has neverthelesscontributed to macroeconomic instability, particu-larly in the highly indebted countries. Unlike inthe nineteenth century, however, falls in outputhave typically been associated with expansionsrather than contractions of the money supply. Theweakness of firms and financial institutions hasmade it difficult for many governments to tightenmonetary or fiscal policy without making mattersworse for ailing banks. Thus, even as many coun-tries were attempting to redress macroeconomicimbalances through fiscal and monetary restraint,the need to assist troubled banks and their borrow-ers compromised the governments' efforts. Subsi-dies to state-owned financial institutions in thePhilippines, for example, were equivalent to 3.4percent of GNP in 1986, which made it difficult forthe government to reduce its budget deficit.

Many governments have aided banks by trans-ferring to the central bank the foreign exchangerisk on banks' foreign currency liabilities. The cen-tral bank exchanged liabilities denominated in do-mestic currency for liabilities denominated in for-eign currency. Later, depreciations of the domesticcurrency resulted in valuation losses for the centralbank. These losses had an indirect expansionaryeffect because banks were required to pay the cen-tral bank less than the amount needed to buy theforeign exchange to cover their obligations. To buythe necessary foreign exchange, the central bankthen had to print money. In some countries thedifference between what the central bank paid onforeign obligations and what it received frombanks and governments has accounted for a largeshare of monetary expansion. The central banks ofCosta Rica, Ecuador, and Yugoslavia had lossesthat sometimes exceeded the amount of new creditextended by the domestic banking system (see Fig-ure 5.2).

A handful of countries (Argentina, Bolivia, andYugoslavia among them) tried to alleviate financial

distress by lowering interest rates. Lower depositrates, however, contributed to inflation and capitalflight by encouraging holders of wealth to turnaway from domestic financial assets toward goodsor foreign financial assets. The process of disin-termediation and the declining demand for domes-tic financial assets compounded banks' difficulties,and the declining demand for money also ampli-fied the inflationary effects of excessive money cre-ation.

Financial distress may not be the principal causeof inflation, but the complex interaction betweenfinancial weakness and macroeconomic policy iscertainly important. Distress and inflation are mu-tually reinforcing. Measures to assist banks havefrequently added to inflation and thereby aggra-vated the distress they were meant to relieve.Resolving the banks' portfolio problems and pre-venting their recurrence calls for a clearer under-standing of why so many firms are unable or un-willing to service their loans.

Roots of financial distress

Explanations of firms' financial difficulties can begrouped under three headings: macroeconomicconditions, industrial and financial policy, anddebtor and creditor behavior. The importance ofmacroeconomic factors is clearest for the countrieswith large external debt burdens. The countrieswith the most acute domestic financial distresshave generally been those with the most severeforeign debt difficulties. The external shocks thatled to the international debt crisis and the policyadjustments that came after it left many domesticfirms unprofitable and unable to service theirdebts, domestic or foreign.

The macroeconomic shocks of the early 1980s areonly a proximate cause of financial distress, how-ever. The financial and industrial policies pursuedby many countries during the 1960s and 1970s lefttheir financial systems weak and vulnerable tochange. Banks were often directed to provide sub-sidized credit to firms in favored regions or sec-tors. In some countries firms in priority sectorshave been consistently unprofitable. In others theywere profitable only as long as they were pro-tected; today such firms account for a large propor-tion of nonperforming loans.

In most cases macroeconomic conditions, di-rected credit programs, and interest rate controlsare the principal factors underlying the current dif-ficulties of firms and their creditors (as discussed inChapter 4). But they are not the only factors. Many

Figure 5.2 Central bank losses and newdomestic credit in selected developingcountries, 1980 to 1987

Percentage of GNP

70

65

/35

30

25

20

15

10

5

Costa Rica 0

35

30

25

20

15

10

5

0

Ecuador 5

35

30

25

20

15

10

5

Yugoslavia 0

Central bank losses New domestic credit

1980 1981 1982 1983 1984 1985 1986 1987

Note. Central bank losses are approximated by the central bank's"Other items, net" (IFS, line 17r), which are mainly foreign ex-change valuation losses.Source: IMF, International Financial Statistics, and World Bankdata.

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governments gave too little thought to the ways inwhich concentration of risk, the quality of informa-tion flows, the adequacy of legal codes, and thenature of the regulatory environment can affect fi-nancial efficiency. Inattention to these issues haspermitted borrowers and lenders to behave inways that have contributed to banks' losses.

An important aspect of borrower behavior hasbeen the tendency of certain groups of firms indeveloping countries to become highly leveraged.Chapter 4 concluded that the high leverage ofthese firms is partly a result of their governments'directed credit programs. The availability of creditat low or negative real interest rates discouragedthe expansion of domestic deposits and gave bor-rowers a strong incentive to take on debtan in-centive reinforced in most countries by tax codesand by the lack of developed equity markets. Be-cause credit was rationed, only firms with privi-leged access to lenders could become highlyleveraged. One group of privileged borrowers con-sisted of firms in priority sectors, including publicenterprises, another of firms belonging toindustrial-financial conglomerates. Where bankswere privately owned, the rationing of subsidizedcredit encouraged companies to buy their ownbanks in order to secure the advantages of cheapcredit by lending generously to themselves.

A drawback to higher leverage was that firmsbecame more vulnerable to a decline in earnings ora rise in interest rates. The firms most embarrassedby the decline in their profits and cash flows in theearly 1980s were already highly leveraged at thebeginning of the economic downturn. Many ofthese made matters worse when they reacted todeclining sales and cash shortages by borrowingmore rather than by cutting costs (laying off work-ers and closing plants, for example). Some ex-pected the economic downturn to be short-livedand so considered borrowing to be their best strat-egy. Some on the brink of bankruptcy saw addi-tional borrowing as their only course. Others, incountries with a history of government bailouts,gambled that the government would intervene toassist overindebted firms. This assumption oftenproved well founded. For example, the Koreanmonetary authorities, in 1972 and again in 1982,lowered lending rates because the prevailing rateswere endangering too many borrowers. In Turkeypublic enterprises in financial straits have regu-larly received large budgetary transfers. In Chilethe central bank granted generous terms to banksrefinancing the debt of distressed but viable bor-rowers.

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Firms could borrow more only if their bankers letthem. Bankers often did cooperate when a finan-cial institution belonged to the same conglomerateas its clients. In Chile, Colombia, Spain, and Thai-land, for example, most bad loans were to relatedcompanies. Government-owned banks were oftentold to continue lending to public enterprises andpriority sectorsanother example of at-less-than-arm's-length credit negotiations. Other bankerscontinued to lend to unprofitable firms, particu-larly large ones, to prevent them from going bank-rupt and in turn bankrupting the banks. Examina-tion of failed and troubled banks has almostinvariably revealed this type of mismanagement(see Box 5.3).

Bankers have been influenced by the authoritiesin other ways. Although only a few developingcountries (Colombia, India, Kenya, the Philip-pines, Trinidad and Tobago, Turkey, and Vene-zuela) have explicit deposit insurance schemes, itbecame clear that governments would at least pro-tect deposits in government-owned banks and thebigger private banks. Despite the difficulties of the1980s, in only a handful of countries have deposi-tors lost money. Implicit deposit insurance avertedbank runs, but in doing so it removed the disci-pline associated with that threat. Depositors' lackof concern about the riskiness of bank portfolioshas allowed undercapitalized banks to stay in busi-ness and encouraged bankers to take bigger risks.The smaller the amount of shareholder capital atstake, the more willing bankers will be to "bet thebank" by financing risky projects.

Mismanagement and speculative behavior per-sist because prudential regulation and supervisionare inadequate in many countries. Prudential regu-lation has two purposes: to prevent excessivelyrisky behavior by lenders in the first instance and,should portfolio problems develop, to forcelenders to address them promptly. In most coun-tries, however, inadequate regulation has permit-ted risky lending, and ineffective supervision haspermitted banks to ignore their losses. For want oftimely and reliable accounting information, the au-thorities lack a clear picture of the health of theintermediaries under their supervision. Effectivesupervision is particularly important in financialliberalization because newly deregulated interme-diaries are likely to engage in less familiar, andtherefore more risky, types of lending. Box 5.4 ar-gues that the combination of deregulation and in-adequate supervision has proved costly in the caseof the U.S. savings and loan industry. Chapter 9contains further discussion of the experience of

Box 5.3 How good bankers become bad bankers

The quality of management is an important differencebetween sound and unsound banks, and in most coun-tries the better-managed financial institutions havesucceeded in remaining solvent. Four types of misman-agement commonly occur in the absence of effectiveregulation and supervision.

Technical mismanagement. Poor lending policies arethe most common form of technical mismanagementand are usually a consequence of deficient internal con-trols, inadequate credit analysis, or political pressures.Poor lending policies often lead to excessive risk con-centration, the result of making a high proportion ofloans to a single borrower or to a specific region orindustry. Banks sometimes lend excessively to relatedcompanies or to their own managers. Mismatching as-sets and liabilities in terms of currencies, interest rates,or maturities is another common form of technical mis-management.

Cosmetic mismanagement. A crossroads for manage-ment is reached when a bank experiences losses.Strong supervision or a good board of directors wouldensure that the losses are reported and corrective mea-sures taken. Without these, bankers may engage in"cosmetic" mismanagement and try to hide past andcurrent losses. There are many ways to do this. Toavoid alerting shareholders to the difficulties, bankersoften keep dividends constant despite poorer earnings.And to keep dividends up, bankers may retain asmaller share of income for provisions against loss,thereby sacrificing capital adequacy. If a dividend tar-get exceeds profits, bankers may resort to accounting

measures that increase net profits on paper, even ifmore taxes must be paid as a result. By reschedulingloans, a banker can classify bad loans as good and soavoid making provisions. The capitalization of unpaidinterest raises profits by increasing apparent income.The reporting of income can be advanced and the re-cording of expenditure postponed.

Desperate management. When losses are too large tobe concealed by accounting gimmicks, bankers mayadopt more desperate strategies. The most common ofthese include lending to risky projects at higher loanrates and speculating in stock and real estate markets.Such strategies, however, involve greater risk and maywell lead to further losses. The problem then becomesone of cash flow: it gets harder to pay dividends, coveroperating costs, and meet depositors' withdrawal de-mands with the income earned on the remaining goodassets. To avoid a liquidity crisis a bank may offer highdeposit rates to attract new deposits, but the highercost of funds eventually compounds the problems.

Fraud. Fraudulent behavior sometimes causes theinitial losses, but once illiquidity appears inevitable,fraud becomes common. As the end approaches, bank-ers are tempted to grant themselves loans that they areunlikely to repay. Another common fraud is the"swinging ownership" of companies partly owned bythe bank or banker: if a company is profitable, thebanker will arrange to buy it from the bank at a lowprice, and if the company is unprofitable, the bankerwill sell it to the bank at a high price.

I

several developing countries that liberalized theirfinancial sectors.

The lack of clear legal procedures for dealingwith insolvent banks has been another obstacle toprompt action. In Argentina, for example, theCentral Banking Act did not empower the centralbank to take over banks, replace managers anddirectors, or order owners to provide new capital.As a result, intervention led to numerous lawsuits.

The difficulty of foreclosing on defaulting bor-rowers has caused losses for many banks. In somecountries willful default is encouraged by the factthat bankruptcy and foreclosure procedures areslow and cumbersome. In Egypt, Pakistan, Portu-gal, and Turkey, for example, loan recovery pro-ceedings frequently drag on for several years (seeBox 6.4 in Chapter 6). In others, willful default hasa more political cause: borrowers in priority sectorssuch as agriculture realize that governments are

reluctant to let lenders foreclose. The default rateamong small farmers in Ghana and India, for ex-ample, has been particularly high.

In sum, poor prudential regulation and supervi-sion, together with inadequate legal systems, letlenders and borrowers in many countries behavein ways that have added to banks' losses.

Lessons of financial restructuring

As the 1980s proceeded, the distress of financialinstitutions in some countries precipitated crisesand so forced the authorities to take action. As Box5.1 indicates, intervention ranged from the closingof a few intermediaries with a small fraction oftotal assets, as in Malaysia, to the closing and re-placement of nearly every bank, as in Guinea.During the next few years many more countriesespecially those contemplating broader programs

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Box 5.4 The U.S. savings and loan crisis: the lessons of moral hazard

More than 500 of the 3,000 savings and loan associa-tions in the United States were insolvent at the begin-ning of 1989. The cost to the Federal Savings and LoanInsurance Corporation (FSLIC) of restructuring theS&L industry through liquidations, consolidations,and assisted mergers was, as of early 1989, estimated tobe roughly $80 billion in terms of present value. Be-cause its own assets were insufficient to meet the po-tential obligations, FSLIC had been unable to close orotherwise dispose of many insolvent institutions, andso loss-making S&Ls were allowed to remain in opera-tion. In early 1989 the U.S. government announced itsintention to cover the FSLIC shortfall through a combi-nation of government funding and higher deposit in-surance premiums to be paid by S&Ls.

The difficulties of the S&L industry began in the late1970s. S&Ls had traditionally lent funds on twenty-to-thirty-year mortgages at fixed rates and funded them-selves with short-term deposits. Higher inflation ratesin the late 1970s and early 1980s and the correspond-ingly higher interest rates that S&Ls had to pay ondeposits sharply depressed earnings.

The response of the U.S. Congress and several statelegislatures was to authorize S&Ls to take on a widerrange of lending and borrowing. Ceilings on depositrates were phased out, and the maximum size of aninsured deposit went up from $40,000 to $100,000. Un-fortunately, lawmakers paid less attention to strength-ening the system of prudential regulation and supervi-sion. Increased lending and borrowing powers gaveS&Ls new opportunities for loss as well as profit. Theywere required to risk little of their own capital; anylosses beyond those amounts would be absorbed by

FSLIC. This gave them strong incentives to take greaterrisks, since they would enjoy all the gains but sufferonly some of the losses. In addition, deposit insurancepremiums were levied at a flat rate per dollar of de-posit, so the premium structure did not discourage risktaking. Insurance experts and economists use the term"moral hazard" to describe this situation of distortedincentives.

Although only a minority of S&Ls fell prey to moralhazard, they did so with gusto. Their losses were com-pounded by changes in the tax law that made real es-tate (in which many of these S&Ls had invested) a lessattractive investment; by a severe economic downturnin oil-producing areas, particularly Texas; by delays inthe imposition of remedial prudential regulations; bydelays in the closure of insolvent S&Ls; and by an ac-counting system that used historical cost-based valuesrather than current market values to determine incomeand solvency.

Valuable (albeit costly) lessons have been learnedfrom this experience. Appropriate prudential regula-tion must accompany the economic deregulation ofdeposit-taking institutions that are explicitly or implic-itly insured by the government. Adequate capital lev-els, preferably related to risks undertaken, are vital.Risk-related insurance premiums can help. Strong su-pervisory and examination powers, enforced by well-trained and well-paid personnel, are important. Mar-ket value accounting systems are indispensable.Finally, if an institution falters toward insolvency, earlyregulatory intervention is necessary to prevent smallproblems from exploding into costly horrors.

of structural reformwill face difficult choices con-cerning the restructuring of their domestic finan-cial institutions and the reshaping of their financialsystems. Even some countries that have alreadytaken steps may find further intervention neces-sary because many institutions still in operationare insolvent.

Restructuring a financial system is both a chal-lenge and an opportunity. Not all institutions areworth recapitalizing; some need to be closed ormerged with healthier ones. Restructuring givescountries a chance to build financial systems thatcan better provide the services their changingeconomies need.

Rationale for intervention

During the 1980s more than twenty-five develop-ing countries have undertaken extensive reorgani-78

zations of their financial institutions. In most casesfinancial crises had occurred or were imminent,and governments could not stand aside. Othercountries, such as Pakistan and Sri Lanka, havenot experienced crises but have nonetheless takensteps to strengthen their financial systems. Severalof the centrally planned economies have decidedto reorganize their financial systems to make themmore efficient and competitive. Many govern-ments, however, have been reluctant to takeaction, and their delay has led to continued lossesat the institutional level and slower recovery at themacroeconomic level.

The authorities in some countries may be un-aware of the seriousness of the situation, since abank's poor health is not always apparent from itsaudited financial statements. Even when govern-ments understand the problem, they are often un-willing to act. Some may hope that intervention

will not be necessary because defaulting borrowerswill start to repay or because banks will make ade-quate provisions for their bad loans. But, as Box5.5 argues, the likelihood of spontaneous recoveryis low. Other considerationsthe budgetary costsof restructuring, issues of fairness in allocating thelosses, the embarrassment of bad loans made topublic enterprises or political allies, or fear of bankrunsalso lead governments to ignore the prob-lem as long as they can.

If there is no crisis, should governments inter-vene merely to relieve financial distress? One rea-son most may have to is that earlier interventionshave made a market solution unlikely. By provid-

ing implicit or explicit deposit guarantees and byregularly granting assistance to troubled banksand firms, governments have suppressed the mar-ket forces that otherwise would have eliminated orreorganized unprofitable firms and allocated theassociated losses. Until governments take the fur-ther step of performing the market's loss-allocating function, losses will continue. As lossesmount, so do the costs of supporting the loss-making institutions. The continuing costs of peri-odic support will eventually outweigh the one-time cost of restructuring.

Governments can either take the next step, byperforming the market's loss-allocating function,

I

Box 5.5 Can banks "muddle through"?

Governments have often refrained from intervening inthe financial sector in the hope that ailing banks willrecover spontaneously. Rather than obliging the banksto make provisions for their losses (which might forcethose with losses larger than capital into bankruptcy),many governments have permitted them to operatewith impaired capital positions. For banks to recoverunaided, at least one of two things must happen:enough defaulting borrowers must resume servicingtheir debts or banks must earn enough to restore capi-tal adequacy.

Simply waiting for economic upturn is risky. In themeantime, only banks whose remaining good assetscan generate more than enough income to cover costswill be able to begin recapitalizing themselves. In re-cent years the earnings of many large U.S. banks, forexample, have been sufficient to enable them to makesubstantial provisions against nonperforming interna-tional loans. The larger a bank's nonperforming loans,however, the smaller its income and the longer it willneed to recapitalize itself. If a bank is losing money,spontaneous recovery is impossible.

To increase income, banks may increase the spreadbetween deposit and loan rates. Box figure 5.5 showsthe spread necessary for a "typical" bank (as definedin the note to the figure) to recapitalize itself throughretained earnings over a period of five years. A bankwith initial losses equaling 20 percent of assets, for ex-ample, would need a spread of 7.1 percent to recapital-ize itself in five years. In practice, competition will limitthe amount by which spreads can be enlarged. Banksthat set lending rates too high or deposit rates too loweventually lose business to competitors. Similarly, gov-ernment efforts to assist the entire financial sector bymandating larger spreads are likely to aggravate banks'difficulties: too large a gap between deposit and loanrates causes lenders and borrowers alike to seekcheaper intermediation.

40

30

20

10

0

0

A "wait and see" approach is likely to prove costly.To recapitalize themselves, banks with large losses(losses greater than their capital) must increase earn-ings substantially. If efforts to increase earnings leadbankers to engage in overly risky behavior, however,new losses will make spontaneous recovery even lessfeasible.

Box figure 5.5 Lending margins needed to recoverin five years from given levels of loss

Percent

50

sit rate

- Lending rate

10 20 30 40 50 60 70

Lost assets as a percentage of total assets

Vote: This example assumes administration costs of 2 percent ofassets, a required capital-to-assets ratio of 5 percent, a reserve re-quirement of 10 percent of assets, a deposit rate of 5 percent, and nodefaults among new borrowers.

1

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or take a step in the other direction, by withdraw-ing deposit guarantees and ending financial assis-tance to unprofitable intermediaries, so that theproblems have to be resolved by the private sector.Once losses have become substantial, a market-imposed solution is likely to be costlier than gov-ernment action because it could lead to bank runsand the loss of foreign credit lines. Events in Ar-gentina, Chile, Colombia, Thailand, and Turkey il-lustrate the difficulty. After initially allowing credi-tors of failed institutions to lose money, theauthorities in each country were forced to extendassistance to prevent widespread bank runs.Prompt government action is thus the less costlyroute, in terms of both the economic costs of con-tinued resource misallocation and the accumulatedfinancial losses that the government is likely to endup bearing.

Aspects of intervention

The central aim of intervention to relieve financialdistress has not been to protect the interests ofbank managers or bank owners or even to preserveparticular banks as institutions but rather to keepthe financial system as a whole in operation. Reha-bilitating insolvent financial institutions has beenthe first step in that process. Most governmentschose to close only small banks; larger ones, partic-ularly those that were critical elements of the finan-cial system, were merged or recapitalized.

Intervention has consisted of across-the-boardrelief, case-by-case restructuring, or a combinationof the two. Case-by-case restructuring requiresmanpower, skill, and time, as the authorities mustmake management-level decisions concerning thefate of individual institutions. If, in addition, thecosts of information and of bargaining with credi-tors are high, an across-the-board approach maylook attractive. It seems faster, and it may be politi-cally more palatable because it is less obvious whogains and who loses.

One across-the-board solution is to generate in-flation deliberately to reduce real debt burdens.This happened in Argentina between 1981 and1983. Another is for the authorities to absorb thebanks' foreign exchange losses, as in Costa Rica,the Dominican Republic, Ecuador, and Yugoslavia.Across-the-board intervention, however, has usu-ally proved wasteful. Since financial distress hasseldom been evenly distributed among lenders orborrowers, much of the relief has gone to firmsand intermediaries that did not need it. More im-portant, troubled borrowers and banks usually

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need restructuring, not just financial assistance.Restructuring is feasible only as part of a case-by-case approach.

INFORMATION FLOWS. Most countries have dis-covered that the information needed to judge theintermediaries' financial condition is either un-available or unreliable. In only a few developingcountries is bank supervision sophisticatedenough to indicate the quality of an institution'searnings and portfolios. Even banks' audited state-ments are often misleading: interest is accruedwhether it is received or not, nonperforming loansare rolled over, and new loans are provided tocover unpaid interest. Even banks with very fewperforming loans may report profits and pay taxesand dividends. One large state-owned bank inLatin America, for example, showed positive earn-ings for 1987, but three months after publishing itsaccounts its managers admitted that 60 percent ofall loans were nonperforming. Insolvent, illiquid,and unprofitable, the bank lost approximately $100million during 1987 alone.

Despite the poor quality of financial statements,in countries with serious financial distress therewere usually warning signals. Some institutionsoffered deposit rates higher than those offered byother intermediaries, a sign that they were short ofcash. At the macroeconomic level, real interestrates well above the average return on investmentsuggested that many firms were short of funds andwere borrowing to remain in business. In somecountries the failure of smaller institutions such asfinance companies and new banks provided fur-ther evidence of widespread distress. Normally,governments tax banks through various mecha-nisms, including reserve requirements. Whereloan portfolios deteriorated, however, the authori-ties were forced to cut the rate of taxation. As theamount of assistance to troubled banks increased,central bank profits declined, and some centralbanks even sustained large losses.

In short, acute distress has generated signalsranging from high real interest rates, widening in-terest rate spreads, a decline in the ability of banksto satisfy reserve requirements, and complaintsfrom established borrowers about the scarcity ofcredit to the more obvious sign of failures amongsmaller intermediaries. Even if a central bank lacksthe precise information that a good system of su-pervision would provide, it can hardly be unawareof widespread distress.

Better information about banks' portfolios givesthe authorities a clearer idea of the intervention

that may be necessary. The authorities in severalcountries, among them Bolivia and Ghana, com-missioned external auditors to conduct indepen-dent audits of domestic banks. But lack of preciseinformation is not a reason to refrain from takingaction. The government of the Philippines reliedupon the management of the two largest banks(the Development Bank of the Philippines and thePhilippine National Bank, which are publiclyowned and together hold about half of the bankingsystem's assets) to identify nonperforming assets.It then assumed responsibility for all nonperform-ing loans above a certain value, along with a cor-responding amount of liabilities.

At the heart of any review of a bank's financialcondition is the issue of accrual of unpaid interestand the provisioning of loans. Because loan roll-overs and interest capitalization have been com-mon, the quality of loan portfolios can be judgedonly if loans are classified by the probability oftheir being serviced rather than simply by whetherthey are current or in arrears. In practice, adjustingfor accrued but unpaid interest has been the singlelargest correction to banks' accounts following in-tervention. This underlines the importance of forc-ing banks to stop accruing interest and to makeprovisions for bad loans as soon as debt service isinterrupted.

ALLOCATING LOSSES. Once governments inter-vened, they had to decide how to allocate losses inexcess of capital and provisions. Regardless of for-mal obligation, most governments protected de-positors against loss to avoid bank runs. Foreigncreditors were also protected, even where theyhad lent to domestic banks without the benefit ofgovernment guarantees, as in Chile. Taxpayershad to absorb the losses instead.

Most governments have decided that the privateowners of insolvent institutions should be re-placed or at least have their ownership diluted.The techniques for doing this vary. In the UnitedStates the courts appoint the deposit insuranceagency as receiver, and that agency arranges forthe sale of institutions. In Colombia and Spain thelaw allows the government to write off the value ofshares and to issue new shares to other thanformer shareholders. In Thailand existing share-holders were allowed to keep their shares, but theissuance of many new shares greatly reduced theirvalue. After restructuring insolvent banks, theChilean government provided cheap credit andgenerous tax incentives to those willing to buyshares in the two biggest banks.

Most governments have decided to replace man-agement as well, in the hope that new managers,distanced from the mistakes of the past, will beable to make the changes necessary to restore thebanks to profitability. In addition to loan foreclo-sure and recapitalization, measures to lower oper-ating costs and improve profitability wereneededfor example, closing branches and reduc-ing staffing levels, establishing new interest ratestructures, and eliminating loss-making activities.The Development Bank of the Philippines cut itsstaff by 50 percent, closed thirteen of its seventybranches, and plans to privatize all but thirteen ofits remaining branches. In Guinea the number ofpeople employed in the financial sector fell from2,350 to 530, and lending to the public sector (in-cluding state-owned enterprises) has virtuallyceased.

Failure to hold bank owners and managers re-sponsible for past problems may encourage exces-sive risk taking in the future and thereby causefurther financial instability. In large markets suchas the United States, finding new owners andmanagers willing to take over weak institutions isusually straightforward, but in smaller marketsthere may be few potential buyers and few man-agers with the necessary expertise. Moreover, ar-ranging the transfer to new management may takesome time. So governments have sometimesfound themselves responsible for the institutionsin which they intervened. Both the Spanish andChilean governments, for example, became theowners and operators of several restructuredbanks until suitable buyers were found.

COST CONSIDERATIONS. At the time of interven-tion the economic costs of financial distress havealready been incurred in the form of poor past in-vestments and slower growth in output. Restruc-turing has no economic cost. On the contrary, itbrings an economic gain in that the economy mayonce again enjoy the benefits of a well-functioningfinancial system. The budgetary cost of restruc-turing consists of the government's cash outlays,which are a transfer from taxpayers to the creditorsof insolvent banks.

This cost has depended on the extent to whichthe banks' losses exceeded their capital. In theUnited States, for example, the expected cost ofdealing with the remaining insolvent S&Ls isequivalent to approximately 2 percent of GNF andin Spain the estimated losses of banks were equiv-alent to 16.8 percent of GNP. In some developingcountries banks' losses as a percentage of GNP

81

have been even larger. The cost of paying off de-positors has been one reason most governmentshave chosen to close small banks and rehabilitatethe bigger ones.

To make insolvent intermediaries solvent again,governments took over bad assets. In some casesthey acquired bank liabilities at the same time; inothers they replaced the bad assets with goodones. The authorities in the Philippines chose thefirst approach; they drastically shrank the balancesheets of the two largest banks by assuming 76percent of their assets and a corresponding shareof their liabilities. The second solution was morecommon, however; governments bought bad as-sets in exchange for long-term government securi-ties, and the interest on the securities was thenused by banks to pay interest on deposits. Thismethod was used, for example, in Chile. Buyingthe bad assets for cash would have been too large afiscal outlay and might have added to inflation byexpanding the money supply.

Over time, restructuring costs are bearable, evenfor a country in which the bad assets acquired bythe authorities amount to as much as 20 percent ofGNP. In such a case, if the real interest rate paid ongovernment bonds is 5 percent, the annual realcost to taxpayers will be 1 percent of GNP. Andthat figure may exaggerate the additional cost tothe taxpayer. In most cases the government hasalready been paying some form of subsidy to helpbanks cover their losses. Furthermore, it may beable to realize something on the nonperformingassets.

Once the authorities have acquired the bad as-sets, they must decide what to do with them. Amechanism is needed to pursue bad debtors anddispose of physical assets taken over in foreclosureproceedings. Central banks have generally provedineffective at recovery and liquidation. One possi-bility is to commission the banks that made theoriginal loans to handle them on behalf of the cen-tral bank, but this has worked only when thebanks were under new management and freedfrom the obligations of previous relationships. An-other course, followed by the Philippines, is to es-tablish an independent recovery agency with itsown funding and staff.

Over the longer run, many countries have de-cided that their central banks should not be re-sponsible for intervening in banks, ordering recap-italization, changing management and directors,or handling the disposition of nonperformingloans and the liquidation or merger of insolventbanks. Some countries have set up specialized in-

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stitutions to handle these tasks. In the UnitedStates they are carried out by the deposit insuranceagencies, which collect premiums to cover thelosses of insolvent intermediaries. In keeping withtheir obligation to cover those losses, the insuranceagencies have the power to inspect insured banks.The advantage of an insurance arrangement isthat, in principle, it shifts the cost of monitoringintermediaries and covering their losses from thegovernment to the financial system and codifiesthe procedure for dealing with troubled institu-tions. This is likely to produce quicker action thanthe ad hoc approach of most developing countries.

RESTRUCTURING BORROWERS. The portfolio prob-lems of financial institutions reflect the difficultiesof their clients. If loss-making firms are not restruc-tured, the newly recapitalized banks that lend tothem will eventually become insolvent again. Re-structuring indebted borrowers is harder than re-structuring financial institutions. Bank restruc-turing may involve closing branches and laying offpersonnel, but it mostly entails rewriting paperclaims. Restructuring companies raises the samedifficult issues of management, ownership, andfairness that have to be addressed in the case ofbanks, but it also calls for decisions about theviability of firms, the restructuring of physicalassets, and the disposition of large numbers ofemployees.

Because recapitalized banks are in a new posi-tion of strength with regard to their former clients,they can refuse to lend money to those they thinknonviable. Thus, in principle, restructured finan-cial institutions have an important role to play inthe restructuring of loss-making firms. But if theprivate sector's restructuring skills are undevel-oped, if the borrowers in need of restructuring arelarge, or if the legal system is weak, governmentsmay have to play a more active role, perhaps withthe help of outside experts. Box 5.6 provides anexample of the complexities that can be involved inrestructuring a large, overindebted firm.

Reforming the financial system

The present frailty of financial institutions in manydeveloping countries is the visible expression of acomplex set of problems. Financial distress inmany cases was precipitated by the macroeco-nomic shocks of the 1980s, but its roots lie in thedevelopment strategies followed since the 1960s.Banks in many countries were directed to providesubsidized credit to priority sectors and public en-

I

Box 5.6 Restructuring a large corporation: a Mexican example

The Valores Industriales S.A, (VISA) group, an inte-grated beverage and consumer goods conglomeratewith more than 40,000 employees, is one of Mexico'slargest industrial concerns. During the late 1970s VISAborrowed heavily to finance ambitious expansion anddiversification plans, but by 1987 it could no longerservice its debt. Like other Mexican companies that hadborrowed abroad, VISA was hurt by devaluation, highinterest rates, and the recession that began in 1982. Asdebt service began to consume most of its severely de-pressed cash flow, investment plans had to be post-poned and basic maintenance expenditure reduced to aminimum. The consequent decline in efficiency andproductivity made matters worse, and in early 1987VISA engaged the International Finance Corporation(IFC) to help it formulate a restructuring proposal thatwould restore the conglomerate's viability and reduceits $1.7 billion debt to a sustainable level.

Eighteen months of negotiations among the existingshareholders and creditors, Mexican government agen-cies, and new investors and creditors produced a com-plex restructuring agreement. VISA was to merge twolarge companiesfully integrating their manufacturingfacilitiesredeploy some of its other installations, andreorganize its administration. In addition, several non-core businesses would be sold.

VISA offered its creditors a variety of options, includ-ing debt buybacks at a discount, debt-for-debt swaps

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(including exchange of VISA debt for sovereign debt),and debt-to-equity conversions. The array of optionsmade it easier for VISA to meet the needs of its sixty-seven creditors, who held varying views of VISA's fu-ture profitability, had different liquidity preferences,and faced different accounting and loss provision re-gimes. Creditors were also permitted to trade claimsamong themselves. Some creditors chose to receivecash for their claims, at a substantial discount from facevalue. Others rescheduled $153 million at floating mar-ket rates and $75 million at lower fixed rates and alsoreceived an equity stake in the restructured company.

To finance its restructuring and debt reduction pro-gram, VISA raised $334 million in cash from new andexisting shareholders and investors. Of this, $135 mil-lion came from new long-term loans, $36 million frombond sales to the Mexican public, and $5 million frompublic share offerings in the Mexico City Stock Ex-change; the sale of assets (including automotive partsfirms and hotels) brought $108 million, and a foreigninstitutional investor bought a $50 million equity stake.

The restructuring restored VISA's competitivenessand reduced its debt from $1.7 billion to $0.4 billion,leaving it a viable concern. The success of its negotiateddebt reduction program was based on the sharing oflosses between lenders and shareholders. Many morefirms in developing countries will have to go throughsimilar reorganizations to become viable.

terprises and often were not permitted to forecloseon defaulting borrowers; occasionally the processwas more political than developmental, with loansbeing made to friends of the government. Manyloans went to industries in which countries had nocomparative advantage and which were profitableonly as long as they were protected. By the 1980smany firms became unable to service their debts.This is not to suggest that all directed loans weremistakes; many were successful. Financial institu-tions are highly leveraged, however, and so can bebankrupted if even a small fraction of their loansgo bad. The inadequacy of prudential regulationand supervision meant that most institutions werenot made to take adequate provisions or write offbad loans, and their books gradually became a cat-alogue of past mistakes.

Problems at the microeconomic level were exac-erbated by macroeconomic policy in many coun-tries. Interest rate ceilings hindered the growth offinancial systems and encouraged capital flight.

Overly expansionary fiscal policies led govern-ments to borrow heavily at home and abroad. Fi-nancial distress has been most serious in countrieswith large external debts. Domestic borrowing inthose same countries crowded out private sectorborrowing and produced inflation. In countrieswith greater macroeconomic stability, financial dis-tress tends to be chronic rather than acute.

Economic recovery requires the restructuring offinancial intermediaries and insolvent firms. It alsorequires a policy environment in which finance canbecome less a tool for implementing intervention-ist development strategies and more a voluntarymarket process for mobilizing and allocating re-sources. The success of that transition dependspartly on increasing lenders' confidence that fu-ture financial contracts will be honored, which inturn calls for an improvement in the ability oflenders to assess risk and to enforce contracts. Thisis the subject of the next chapter.

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6/ounaons of financial systems

If financial systems are to be efficient and robust,they must be set within a suitable legal and regula-tory framework. The difficulties of financial institu-tions in developing countries, discussed in Chap-ters 4 and 5, have much to do with weak legalsystems, a lack of reliable financial information,and inadequate prudential regulation. A system oflaws and regulations is needed to promote the useof contracts that are clear about the rights and obli-gations of contracting parties, to encourage disci-pline and the timely enforcement of contracts, andto foster responsible and prudent behavior on bothsides of the financial transaction. Prudent and effi-cient financial intermediation calls for reliable in-formation on borrowers, so adequate accountingstandards and auditing arrangements are essen-tial. Governments must also ensure that financialinstitutions (especially if they take deposits fromthe general public) are acting honestly. These arethe objectives. This chapter examines the mea-sures that can help to achieve them.

Financial contracts and debt recovery

Since ancient times, lenders have insisted uponappropriate assurances of repayment. Their diffi-culty has been that although they have considera-ble bargaining power before they enter into a loanagreement, the borrower is in the stronger positiononce the money is handed over. The borrower may

waste or misuse the funds or simply refuse torepay.

Under early Roman law, if the debtor did notpay within a specified time after judgment hadbeen passed, creditors were at liberty to dispose ofthe matter by selling him into slavery or executinghim. Later Roman law viewed this as rather harshand introduced a procedure whereby the whole ofthe debtor's property could be seized and sold, butthe debtor was still not discharged from his liabili-ties. Eventually, voluntary bankruptcy proceed-ings with full discharge were introduced for theunfortunate borrower who could prove that hisembarrassment was due to forces beyond hiscontrol.

By the fourteenth century, after the rediscoveryof the Justinian codes of Roman law, debt recoveryin Italy and Spain was based on Roman proceed-ings. These later influenced most of the countriesof continental Europe. Under English commonlaw, remedies were harsher. Defaulting debtorswere usually imprisoned during the Middle Ages,and no distinction was made between honest butunfortunate debtors and dishonest ones. More le-nient treatment of honest debtors was first intro-duced by statutory law in the sixteenth century.Debtor prisons remained common almost every-where well into the nineteenth century, but havesince been abolished (or at least used only in casesof fraud).

Industrial countries introduced far more com-plex bankruptcy statutes during the nineteenthcentury to deal with a larger number of differentcreditors. And in the twentieth century, with theemergence of large corporations, reorganizationrather than liquidation became an important objec-tive of bankruptcy statutesfirst in the UnitedStates and more recently in other countries as well.

Apart from these ultimate remedies, creditorshave traditionally made extensive use of collateral(mortgages, floating charges, liens, and so forth)and personal guarantees to reduce the probabilityand cost of default. Consequently, annual loanlosses of commercial banks in industrial countrieshave typically been less than 1 percent of outstand-ing balances (which has helped to keep total inter-mediation costs at less than 4 percent). Nonper-forming loans in many developing countries arenow 20 percent of total loans and in some casesmore. Profitable lending becomes almost impos-sible at these default rates, because few invest-ments will yield returns high enough to cover theinterest that must be charged (see Box 5.5 in Chap-ter 5). Only optimistic speculators or borrowerswho intend to defraud the lender would be willingto borrow large sums at real rates of interest inexcess of 10 or 15 percent.

The ultimate security of the lender is the com-mercial success of the borrower. This should be theprimary basis for the decision to lend. But it isoften difficult for lenders to assess the probabilitythat a project will succeed. People who write elo-quent loan and project proposals are not necessar-ily good managers or entrepreneurs, and viceversa. Bankers have thus traditionally been veryconservative in their lending decisions and haverelied largely on the track record of loan appli-cants. This inevitably meant that people with sub-stantial wealth could borrow more than others.Since wealth can be acquired by inheritance as wellas by entrepreneurial gifts, the governments ofmany developing countries viewed lending on thesecurity of personal property as in conflict withtheir development objectives. For example, theTandon study group appointed by the ReserveBank of India pointed out in the early 1970s that"nationalization of the major commercial banks

called for a new policy with respect to depositmobilization. . . and equitable disbursal of credit.The banking system was asked to adopt a newapproach as a credit agency, based on develop-ment and potential rather than on security only, toassist the weaker sections of society . . . thesecurity-oriented system tended to favor borrow-

ers with strong financial resources, irrespective oftheir economic function" (Banking Laws Commit-tee 1978, p. 77). This approach overlooks the factthat credit decisions are rarely the best way to dealwith social inequities.

Developing the legal foundations

The development of clear legal rules concerningthe economic rights and obligations of differentagents should go hand in hand with economic andfinancial development. In rural societies local sanc-tions have played an important part in limiting dis-honesty by contracting parties (see Chapter 8), buturbanization has made local sanctions less effec-tive. More complex rules and regulations are re-quired to govern the impersonal relations of mod-ern commercial life. And the emergence of largecorporations has called for a continuously evolvingset of rules to resolve the shifting conflicts of inter-est among shareholders, managers, bondholders,employees, and consumers.

Most developing countries have legal systemsthat were imposed during colonial rule. Thesewere often at odds with local custom. Indonesia'ssophisticated system of customary adat law useslegal concepts (for example, with respect to landtenure) that are quite different from those in thecivil and commercial codes imported by the Dutch.Under the Dutch, adat law applied to Indonesiansand Dutch law to Europeans and modern institu-tions such as companies and banks (since adat lawdoes not cover loan contracts or similar transac-tions). These parallel systems are still in use today.Inevitably, they cause conflict and uncertainty, andweak judicial administration has compounded theproblems. As a result the legal system has a dimin-ished role in the settlement of disputes. Even incountries with only one legal system, the difficul-ties can be severe. A report of the Indian BankingLaws Committee (1978, p. 76) observed that "thepresent chaotic state of our credit-security law,particularly of our personal property security law,is primarily due to the application of archaic princi-ples and concepts of Common Law developed acentury ago."

In contrast to other developing countries, Koreaand Thailand have imported and adapted foreignlegal systems on their own initiative. Korea en-acted new codes based on German law in 1958 and1962 (see Box 6.1). Thailand adopted a civil andcommercial code based on the French and Germancodes in 1923. Japan had done the same in 1898and 1899. In all three cases local customs and polit-

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Box 6.1 Civil and commercial lawin Korea

Korea is one of the few countries that have intro-duced a comprehensive Western system of law ontheir own initiative. Like China, Korea was tradi-tionally a Confucian society in which relationswere structured not according to law but accord-ing to ideas of familial hierarchy, with the king oremperor at the top. After a period under Japanesedomination (and Japanese civil law), the newlyindependent Republic of Korea set out to devisean entirely new legal framework. New civil andcommercial codes were enacted in 1958 and 1962.Both were modeled largely on the German civiland commercial codes but contained significantchanges to reflect local customs and traditions,particularly with regard to family law and succes-sion. The Korean codes introduced some interest-ing innovations. For example, Korean law permitsthe use of mortgages on real property to securefuture advances under a line of credita usefuldevice that is not usually allowed by civil law.

Like most other civil codes, modern Korean lawdistinguishes between ordinary people and mer-chants; the commercial code applies only to thelatter. Contractual obligations are more clearly de-fined than in most other developing countries,and enforcement is swift. Reorganization andbankruptcy are modeled on the U.S. bankruptcycode, which emphasizes the rehabilitation of acorporate debtor rather than the distribution of itsassets to creditors.

ical conditions when the new codes were intro-duced were quite different from those prevailing inthe countries whose legal systems were used asmodels. But the need to furnish their economieswith a legal infrastructure that would facilitate ex-change and financial intermediation was pressing.All three governments adapted the foreign codesto local customs (particularly with respect to familylaw) and to economic circumstances.

In some countries inherited legal systems havenot been updated to meet the changing needs ofthe economy. In addition, commercial laws may beweakly enforced because of cumbersome proce-dures or because inadequate resources are devotedto the task. But just as too few rules can createuncertainty, so can too manyespecially if theykeep changing.

To make their legal systems more effective, gov-ernments need to provide for acceptable collateral

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(an issue closely related to the assignment andtransferability of property rights), to rationalizecompany legislation (especially with regard to dis-closure of information and bankruptcy and reor-ganization proceedings), and to strengthen law en-forcement. Contract performance can be improvedby making breach of contract more costly. Provi-sion of security, such as pledged or mortgaged as-sets and third-party guarantees, is one approach.Lenders can ensure repayment in other ways too:by attaching covenants to the loan contract, by ap-pointing a representative to the board of directors,through contingent ownership of assets (by meansof convertible debt securities, for example), and byclosely monitoring the borrower.

Property rights and collateral

The legal recognition of property rightsthat is,rights of exclusive use and control over particularresourcesgives owners incentives to use re-sources efficiently. Without the right to excludeothers from their land, farmers do not have anincentive to plow, sow, weed, and harvest. With-out land tenure, they have no incentive to invest inirrigation or other improvements that would repaythe investment over time. Efficiency can be furtherserved by making property rights transferable. Afarmer might then sell his land to a more produc-tive farmer and take up another occupation forwhich he is better suited. Together, these rights touse, benefit from, and freely dispose of an assetconstitute ownership.

China's rural economic reforms consisted mainlyof restoring land tenure to households. Farmers inChina do not own their land, but tenure is nowfairly long term; it amounts to the leasehold con-cept of common law. Farmers can use this lease-hold as collateral. The success of the reforms dra-matically illustrates the benefits that can springfrom changes in an economy's legal infrastructure.

Property rights are not usually absolute. Thestate claims a share of the benefits from the use ofresources in taxesto pay for, among other things,the protection of property rights from external andinternal threats. Societies recognize many other re-strictions on property rights for the common good,including the right of eminent domain to buildroads, harbors, power lines, and other infrastruc-ture. Property rights may also be limited in timefor example, through leasehold of land rather thanabsolute ownership or (less directly) through in-heritance taxes applied to a broad range of assets.

Changes in the value of resources as a result of

economic development may require an expansionand redefinition of property rights from time totime, especially since conflicts between rights overdifferent resources cannot be fully avoided. As re-sources become scarcer and more valuable, prop-erty rights become more important. Gradually,they have been extended to formerly "free" goodssuch as pastures, water, coastal fishing zones,broadcast frequencies, geostationary satellite or-bits, technical inventions, and other intellectualproperty. Property rights are becoming universal,

MORTGAGES. The assignment and transferabilityof property rights promote economic efficiency di-rectly by creating new incentives, but also indi-rectly by making financial intermediation possible.They do this by allowing borrowers to offer secu-rity in the form of mortgages over real estate orother collateral. Some assets are better collateralthan others. Immobile, general purpose assets,such as real estate, have very desirable properties:they cannot be easily misappropriated, and theycan be quickly resold for an amount close to thepurchase price. A copper smelter, in contrast, re-tains its value only if it can compete with otherplants and the price of copper does not fall. Exten-sive debt financing of copper smelters is thereforerisky.

When taking collateral, the lender is mainly in-terested in the efficient transfer of property rights,

because the security is invoked only in the case ofdefault and may deteriorate or disappear if toomuch time elapses before he can take possession.Mortgages over land and other real estate aretherefore one of the best forms of collateral. Inmost countries real estate accounts for betweenhalf and three-quarters of national wealth. If own-ership is widely dispersed, tenure is secure, andtitle transfer is easy, real estate can be good collat-eral for nearly any type of lending (see Box 6.2).Unfortunately, these conditions are not alwaysmet in developing countries. Land distribution isoften skewed, tenure (if any) insecure, and titletransfer cumbersome. One key to a smoothly func-tioning system of land tenure is land registers sup-ported by cadastral surveys. In many developingcountries these are still woefully inadequate ormissing altogether.

Often, a loan secured with real estate will financenot the acquisition of real estate but something en-tirely different, perhaps a new entrepreneurialventure. The risk for the lender remains low be-cause the borrower is bearing the entrepreneurialrisk. But if the entrepreneur has no suitable collat-eral, the risks to the lender increase dramatically.The lender will then need far more informationand perhaps a share in the proceeds if the ventureproves a success. Venture capital, equity participa-tion (with or without parallel loans), debt securi-ties convertible into equity, and profit sharing ac-

Box 6.2 Financial and economic effects of land tenure in Thailand

Thailand has a relatively efficient system of land ten-ure, title transfer, and use of collateral. In 1901 the gov-ernment introduced the Torrens system in which landtitles are based on cadastral land surveys and regis-tered with central land record offices. The use of landas collateral increased significantly, but land registra-tion was concentrated in the more heavily populatedareas. In the early 1960s half of the land area of Thai-land was designated as national forest reserve, includ-ing land that was already being farmed. Most farmersin the forest reserve have no transferable title to theirland, but the government has enforced the forest re-serve policy flexibly and has not evicted farmers.About one-fifth of the farmed land does not have se-cure and transferable title.

Although uncertainty about continued possessiondoes not seem to worry untitled farmers, lack of titledownership affects their access to institutional credit.Untitled farmers cannot provide collateral and are lim-

ited to borrowing on the basis of personal or groupguarantees or from moneylenders. (Moneylenderscharge interest rates of 40-50 percent, compared withabout 15 percent for loans from financial institutions.)In a sample study of matched groups of titled and unti-tled farmers, titled farmers were able to borrow on av-erage three times more per acre of land. Secure landtitle not only affected the ability to obtain mortgagecredit (which accounted for half of all credit amongtitled farmers) but also doubled access to unsecuredcredit.

Thanks to easier access to credit, titled farmers madesignificantly more land improvements and used signifi-cantly more machinery and other inputs. As a resultthey enjoyed 12-20 percent higher farm revenues and12-27 percent higher productivity than untitledfarmers in similar regions. The government has re-cently taken steps to improve land tenure for untitledfarmers.

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Box 6.3 Islamic banking

Several Islamic countries have recently introducedbanking on Islamic principles. They include Iran,Malaysia, Pakistan, and Saudi Arabia. Islamicprinciples permit profit but do not allow fixed in-terest on deposits or loans. Nevertheless, Islamicbanking can be made to work quite well and pro-vides an interesting contrast to commercial bank-ing practices elsewhere. In countries such as Paki-stan the introduction of Islamic banking hasimproved the functioning of the financial systemin some respectsfor example, by making returnsto financial instruments more market-driven.

Islamic banks offer savers risky open-ended mu-tual fund certificates instead of fixed-interest de-posits. (This is not unlike cooperative banks andmutuals in the West, where deposits earn variableinterest and double as equity.) Difficulties arise onthe lending side. Arrangements to share profitsand losses lead to considerable problems of moni-toring and control, especially in lending to smallbusinesses. In practice, profit sharing undermusharakah agreements is often based on prior es-timates of profit. Another way to avoid explicitinterest charges is to combine commercial and fi-nancial contractsfor example, through hire-purchase arrangements or advance purchase bybanks of inputs which are then resold at amarkup.

Another difficulty has been to devise suitablegovernment securities. A rather liberal interpreta-tion of Islamic principles would permit discountedsecurities. Other possibilities include linking re-turns to nominal GDP growth or to the return oncertain revenue-earning public projects.

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cording to Islamic principles (see Box 6.3) are allexamples of such arrangements.

In some countries other assets can serve as col-lateral. Inventories and other movable goods areinherently poor collateral because they have com-paratively little value, are destructible, and can besold privately and informally. They are difficult touse as collateral when left in the possession of theborrower. A partial solution is to make some goodslegally "immovable" by creating special title regis-ters. This is feasible only for a few large and high-value movables, such as ships, aircraft, motor ve-hicles, or industrial machines. Another solution isto store commodities of a standardized quality incertified warehouses and issue warrants. Ricewarehouse warrants have been used in Japan for

several centuries. The spread of such facilities invarious countries has increased the use of invento-ries as collateral.

For goods in transit, the bill of lading can serveas security. Documentary export-import credit isan important application of this sort of collateral.Korea and some other countries have further de-veloped this idea by creating a domestic letter ofcredit based on an irrevocable export letter ofcredit. In this way the primary exporter can extendhis creditworthiness to suppliers of intermediateinputs.

DEBT RECOVERY. Legal systems in developingcountries often favor the borrower by making ithard for the lender to foreclose on collateral. Origi-nally, such provisions were intended to protectsmall borrowers against unscrupulous moneylend-ers, but today they may adversely affect the abilityof state-owned commercial banks to collect onloans. This raises the costs of intermediation andweakens banks' portfolios; as a result the ability oflenders to extend loans to new and creditworthyborrowers is undermined. Creditors often have tosue the defaulting debtor for payment, which inmany countries in South Asia, for example, maytake several years. Once a judgment has been ob-tained, the creditor may then have to sue for exe-cution of his claim. Five to eight years may passfrom the date of nonpayment to the final recoveryof the collateral. Pakistan is among the countriesthat have recently taken legal and procedural stepsto speed this process (see Box 6.4).

Cumbersome recovery procedures have led tonew lending arrangements that redress the bal-ance in favor of the creditor. Hire purchase andleasing may have become popular partly becausethe lender retains title to the asset being financedand can take possession without any legal formali-ties if the borrower is late in paying. Leasing alsoowes its popularity to its role in circumventing in-terest rate controls and taxes. It has often restoredaccess to financing that excessive bank regulationand weak legal systems had blocked.

Company law

Large enterprises have become an important partof modern economic activity in most industrial anddeveloping countries. Today, the largest 100 corpo-rations typically account for between 30 and 50percent of total manufacturing production in in-dustrial countries. Industrial concentration is ofteneven more pronounced in developing countries.

Box 6.4 Commercial law enforcementin Pakistan

Pakistan's financial institutions have sufferedbadly from excessive arrears. Matters did not im-prove when the major commercial banks were na-tionalized in the 1970s. Enforcement of loan con-tracts in default was too slow to have muchdisciplinary effect on borrowers. Often it took fiveyears or longer before the bank could foreclose onmortgaged property.

Recognizing the problem, the government es-tablished a system of special banking courts in1979. In 1984 a corresponding system was estab-lished to deal with loan recovery for the newlyintroduced Islamic financing instruments. Prob-lems remain, however. Debtors can still challengecourt rulings at every step, and five-year delayscan still occur. More special courts are to be estab-lished over the next two years, and their jurisdic-tion will be narrowed to exclude very smallclaims. Once a bank has obtained judgment froma special court, it will no longer have to applyseparately for execution of the decree.

An institutional innovation of the nineteenthcentury made this possible: the general incorpora-tion of joint-stock companies with limited liability.Until the 1850s free incorporation and limited lia-bility were viewed with considerable skepticism.General incorporation was prompted by the largecapital requirements of railway construction,which could not be met by the small private bank-ing houses.

The new companies called for rules and regula-tions to protect the interests of shareholders, credi-tors, and other interested parties, including em-ployees. The resulting structure of control featuresagents (directors or independent auditors) whomonitor management on behalf of the owners;elaborate accounting, information, and disclosureprocedures; disciplinary systems that align the in-terests of managers and owners; and a clear as-signment of responsibilities. With hundreds andsometimes millions of shareholders, limited liabil-ity became essential. Individual shareholders hadlittle influence over the affairs of the company.They had become "investors," in some ways cred-itors more than owner-managers. Limited liabilityshifted more of the risk to other creditors. As aresult better bankruptcy and reorganization rules

were needed too, so that creditors could take con-trol if the company ran into difficulty. And mostcountries have enacted labor laws to offer employ-ees some protection against unscrupulous ownersand managers.

State or private ownershipdoes it matter?

An alternative to the joint-stock structure for man-aging large enterprises is state ownership. Some ofthe first big industrial enterprises and financial in-stitutions were publicly owned. State ownership isthe predominant form of industrial organization incentrally planned economies, and state-owned en-terprises account for a substantial part of the econ-omy in many other countries. In a sample of nine-teen developing countries in 1984 and 1985, stateenterprises accounted for an average of 13 percentof GNP and 31 percent of domestic investment;they were concentrated in capital-intensive heavyindustry and utilities such as steel, chemicals, elec-tricity, oil, and gas. Intermediate forms of "owner-ship" such as cooperatives, mutuals, foundations,and franchises have also become common. Stateenterprises in some countries are legally consti-tuted as joint-stock corporations; some of these(but not all) seem to operate like private enter-prises.

Successful public enterprises such as BritishSteel, Renault (before its recent difficulties), andBrazil's Empresa Brasileira de Aeronáutica (EM-BRAER) are often cited as proof that public enter-prises can be as efficient and innovative as privateenterprises. Indeed, it is often argued that owner-ship does not matter as much as the independenceand accountability of management and the extentof competition.

In practice, however, the form of ownership goesa long way to determine the environment withinwhich management operates. Lines of authorityand responsibility are often blurred in state enter-prises. Their chief executives usually take ordersfrom various government agencies, their freedomto reward and discipline employees is circum-scribed by rules of seniority and guaranteed em-ployment, and their own compensation is rarelylinked directly to profits. Understanding thesedrawbacks, some governments have tried to createa self-regulating regime for their state enterprises.But the boundary between the government's do-main and the market's is ambiguous. Economies ofscale, externalities, and scarcity of informationcause complications that may prompt govern-ments to intervene.

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Bankruptcy and reorganization

For centuries bankruptcy procedures have enabledcreditors to recover their resources from debtorswho defaulted. The emergence of large corpora-tions, however, called for a new approach. When acompany is having difficulty in servicing its debt,reorganizing the enterprise might yield higher re-turns to its creditors than closing it down and sell-ing its assets. Reorganization might mean resche-duling its interest and principal payments,reducing its interest charges, downgrading thequality of claims against it (for example, by releas-ing mortgage liens or by swapping debt for eq-uity), or reducing or canceling its debts.

Such a far-reaching modification of the rights ofcreditors cannot be taken lightly and can be justi-fled only if it is in their best intereststhat is, if itwill make them (or society) better off than debtrecovery through liquidation. Reorganization mayalso weaken the incentives for good performance,particularly if the present management is left inplace. Reorganization becomes more difficult asthe number of creditors grows. Rules are needed,for example, to ensure that a few small creditorscannot jeopardize a reorganization plan that is inthe interests of the majority.

Few developing countries have well-developedlaws and procedures for reorganization. Often thetask is delayed and takes place only through adhoc government intervention. Indonesia's bank-ruptcy code, for instance, has rarely been used.China and Hungary have recently reintroducedbankruptcy regulations because state enterprisesare becoming more independent and the privateand cooperative sectors are expanding. Becausemany developing countries are now trying to relymore on decentralized decisionmaking, marketforces, the private sector, and financial intermedia-tion, they too will need to introduce procedures forcorporate restructuring that go beyond liquidationand bankruptcy. To ensure that such proceduresdo not encourage managers to take excessive risks,governments could devise penalties for reckless-ness and fraud and for concealing the insolvencyof a corporation.

Timely and accurate accounts

Because financial claims cannot be fully secured,monitoring and information are essential. In infor-mal financial markets, information is usually ob-tained as a by-product of other activities of thelenderfor example, through his trading with theborrower. For larger organizations, more formal

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monitoring techniques are necessary, both for in-ternal use to monitor the performance of subunitsand for use by outsiders with a legitimate interestin the performance of the corporation. These tech-niques are management accounting and financialaccounting, respectively.

Standardized accounting concepts and princi-ples were developed only after the financial crisesof the 1920s and 1930s. Before then, there was nourgent need to standardize the conventions ofmanagement accounting: owners and managersset their own rules. But with the emergence ofgeneral incorporation and limited liability, stan-dardized information became essentiala pointbrought home forcefully during the 1930s, whenmany small investors lost their savings becausethey trusted inaccurate financial statements.

Governments responded by tightening account-ing and auditing requirements in a number ofways. In the United States, for example, the Secu-rities and Exchange Commission (SEC) was cre-ated to regulate securities markets and to make thefinancial process more transparent. The SECturned to the professional association of accoun-tants to develop accounting concepts (such as fairmarket value, consistency, accrual, going concern)and detailed rules, or "generally accepted account-ing principles," that became binding on the pro-fession. A similar approach was adopted in theUnited Kingdom and in many Commonwealthcountries.

Continental Europe and Japan and several othercountries adopted a somewhat different approach.They placed greater emphasis on detailed ruleslaid down in company laws, usually with particu-lar stress on prudence (historical cost accounting)as opposed to fair value, and on a larger role forthe tax authorities in defining accounting rules. Inmany of these countries, tax accounts and financialaccounts must be drawn up on a fully consistentbasis.

Because of these and other differences in ap-proach, company accounts cannot be easily com-pared across countries. For example, companies inGermany, Japan, Korea, and Thailand usually ap-pear highly leveraged (that is, with high levels ofdebt relative to net worth) when compared withcompanies in Argentina, Brazil, Canada, or theUnited States. Most of the difference, however, isdue to different accounting conventions. The firstgroup relies more on historical cost accounting,with many assets (especially land) valued at lessthan their market value, whereas the second groupregularly revalues some or all assets. In manycountries with high inflation, full revaluation has

become the rule because historical cost accountingbecomes virtually meaningless under such condi-tions. Market valuation can be equally trouble-some for assets with drastic, cyclical changes invalue (for example, some types of securities, rawmaterials, and commercial real estate).

Efforts have recently been made to harmonizeaccounting and auditing practices internationallythrough the International Accounting StandardsCommittee and, in a more far-reaching way,within the European Community. The result is aconvergence of the Anglo-Saxon and continentalapproaches, with greater standardization of finan-cial statement formats on the one hand and agreater use of the concept of fair market value onthe other.

In developing countries accounting and auditingpractices are sometimes weak, and financial lawsand regulations do not demand accurate andtimely financial reports. Developing an effectiveaccounting and auditing profession is essential forbuilding efficient financial markets, and projects todo this have recently been introduced in Indonesiaand Madagascar, for example. Training and educa-tion are the main requirements, but appropriateregulation and regulatory bodies are also needed.

Timely accounts are very important for financialinstitutions. Annual or quarterly accounting mightbe sufficient for most nonfinancial firms, but finan-cial institutions can lose their risk capital virtuallyovernight if, say, they hold large open positions inforeign exchange or futures and options contracts.Internal and external financial reporting thereforeneeds to be much more frequent, with certainkinds of information available to managementdaily.

Prudential regulation of financialinstitutions and markets

Procedures for settling private disputes are setforth in most company laws, commercial codes,and special banking acts, but the development of asound financial system requires additional mea-sures. Prudential supervision by government au-thorities is warranted for banks and some otherfinancial institutions and markets. Banks hold animportant part of the money supply, create money,are the main means of implementing monetarypolicy, administer the payments system, and inter-mediate between savings and investments. Prob-lems in one bank can quickly spread through theentire financial system. Bank failures have mone-tary and macroeconomic consequences, disruptthe payments system, and lead to disintermedia-

tion (which decreases the mobilization of resourcesand the availability of finance for investment).

As financial systems develop, different institu-tions evolve to take over some activities formerlyperformed by banks and to provide new services.All these institutions, old and new, are integratedin an increasingly complex financial system. Thiscomplexity limits the ability of creditors to exerciseeffective control and calls for prudential regulationand supervision.

Regulation of banks

Bank supervisors in many developing countries fo-cus on compliance with monetary policy regula-tions, foreign exchange controls, and economicpolicy regulations such as those for allocatingcredit. They pay relatively little attention to theprudential aspects of financial monitoring. For ex-ample, in many countries supervisors make no in-dependent assessment of the quality of assets andgive scant regard to accounting procedures andmanagement controls. Together with macroeco-nomic instability and the lack of adequate leg-islation, this is one of the main causes of bankinsolvency.

Governments in developing countries are preoc-cupied with faster economic growth; they seebanks as an instrument for promoting the desiredinvestments. Often, however, these investmentsare the most risky from a bank's point of view, sothe volume of credit extended to them remains lessthan the governments would like. The govern-ment reaction is often to force the banks to extendcredit to priority sectors. This policy has been pur-sued without adequate attention to the risks in-volved. With the benefit of prudential regulationand supervision, however, governments can ob-tain information about the consequences of theirpolicies while there is still time to modify them.

The goal of bank supervision, then, is to pro-mote a safe, stable, and efficient financial system.The main task is to prevent bank failures, but thisdoes not mean that financial institutions shouldnot be allowed to fail. Bank supervisors must try toidentify problems at an early stage and intervenebefore the situation gets out of hand. For this rea-son they have to be organized in such a way thatthey are constantly aware of developments.

ORGANIZATION. In many developing countriessupervision tends to rely predominantly on analy-sis of bank reports or on bank inspections. Off-sitesupervision cannot assess risk adequately, and in-spections tend to be too infrequent. Effective su-

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Box 6.5 Elements of a bank supervision system

An adequate system of bank supervision should allowfor both off-site supervision and on-site inspection.The task of the off-site supervisors is to analyze reportsof the banks, identify possible problems, and proposeremedies. Banks in most countries have to submitmonthly balance sheet information for purposes ofmonetary control. It would make sense to combine thetwo reporting requirements.

After receiving the reports, the off-site supervisorsshould:

Check their completeness, accuracy, and consis-tencyCheck their compliance with prudential ratios andregulationsAnalyze the financial situation of the bank andidentify the main changes in financial ratiosIdentify other risks such as foreign exchange risks,interest rate risks, and concentration risksPrepare a summary for the management of the su-pervisory agency and recommend action.

The on-site inspectors should check the accuracy of

the periodic reports to the supervisor and analyzethose aspects of a bank that cannot be adequately mon-itored by off-site supervision. Inspections, however,should not become audits. They should focus on thebank's main activities and on the potential problemsthat were identified by off-site supervision. Inspectionsshould assess the quality of assets, management andcontrol procedures, and accounting systems. The in-spectors should:

Study the main credit files (and a sample of smallerfiles) to assess the lending procedures and thequality of the loansEvaluate lending procedures and review minutesof meetings of the credit committee and the boardof directorsCheck management information systems and in-ternal controls, especially with regard to the activi-ties of branches and subsidiariesEvaluate accounting procedures, especially thosefor provisioning and interest accrual.

pervision calls for both. Off-site supervisorsshould analyze reports periodically submitted bythe banks, and on-site inspectors should verifytheir accuracy, obtain detailed information aboutpotential problem areas, and review the elementsthat off-site supervisors cannot properly assess.Box 6.5 goes into this in more detail.

LICENSING. The purpose of licensing should beto ensure adequate capitalization and sound man-agement, not to limit entry or restrict competition.Bank supervisors should have the authority toscreen potential owners and managers to preventthose lacking adequate professional qualifications,financial backing, and moral standing from obtain-ing a banking license. In many countries restric-tions on entry into banking are so severe that theycause oligopolistic practices and suppress competi-tion.

Sometimes entry restrictions are defended by cit-ing the poor quality of the existing banks' portfo-lios. The supervisors fear that these banks couldnot withstand competition from new institutionswith "clean" portfolios. If portfolios are weak be-cause of government lending directives or drasticadjustment programs, a good case can be made forcleaning up the balance sheets of the existingbanks before liberalizing entry. More generally,

however, managers and shareholders should beheld responsible for past mistakes. If that meanslosing market share to leaner and more efficientcompetitors and, in extreme cases, bankruptcy orreorganization, so be it. But liberal entry into fi-nancial services should not mean unqualified en-try. Several countries with easy entry (Egypt,Thailand, and Turkey, for instance) have experi-enced problems with unregulated, undercapital-ized, and poorly managed banks and other finan-cial institutions.

CAPITAL ADEQUACY. Banks need capital to absorbunusual losses. The need to maintain an adequatecapital-to-assets ratio exerts discipline on lending.Regulations should set minimum guidelines forcapital adequacy that cover both assets and itemsnot listed on the balance sheet (such as guaranteesand lines of credit). Standards of capital adequacycan take account of different degrees of risk byrequiring, for example, 100 percent capital forhigh-risk items such as industrial shares, 10 per-cent for unsecured loans, 5 percent for securedloans, and so on. The recent agreement amongmajor industrial countries on standards of capitaladequacy uses risk weights and might serve as astarting point for others. In many countries finan-cial institutions were significantly undercapitalized

even before portfolio and other losses were recog-nized. Government-owned banks, in particular,often operate with little capital. When governmentofficials and the public at large believe that stateownership is a guarantee against failure, the man-agement is not subject to the discipline that capitaladequacy requirements would provide for a pri-vate institution.

ASSET CLASSIFICATION AND PROVISIONING. Banksin developing countries rarely make realistic provi-sions for potential losses or problem assets. Oftenthey fail to write off or provide for actual losses orto suspend interest on nonperforming loans. As aresult their balance sheets and income statementsare misleading. Bank supervisors should be able torequire banks to make appropriate provisions forloan losses, to write off uncollectible assets, and tosuspend interest on nonperforming loans.

LIQUIDITY. In many developing countries bankshave to comply with a short-term liquidity ratio.This ratio is often used more as a reserve require-ment for purposes of monetary policy than as aprudential measure to guard against lack of liquid-ity. Liquidity risk arises because banks borrowmoney at short maturities and lend it at long. Therisk is not just that a bank will not be able to repaydepositors' money when called, but also that inter-est rates on short-term liabilities will rise fasterthan those on longer-term assets. Ratios thereforeneed to be set and monitored for long-term as wellas short-term liquidity.

PORTFOLIO CONCENTRATION. Limits on lending asa percentage of a bank's capital are necessary toprevent the concentration of risk in a single bor-rower, a group of related borrowers, or a particularindustry. Some developing countries set no lend-ing limits at all. In others the limits are set at im-prudent levels, in some cases exceeding 100 per-cent of bank capital. Ghana's central bank hadlegal authority to set lending limits but until re-cently did not do so. The resulting concentration ofrisk eventually led to the technical insolvency ofseveral major banks.

ENFORCEMENT POWERS. In many countries super-visors can impose fines and penalties for criminalacts and violations of specific banking statutes.There may, however, be little they can do to ad-dress unsafe and unsound banking practices.Their options are either to cancel the banking li-cense or to do nothingneither of which is accep-

table. Supervisors could be empowered to takecertain intermediate steps: impose fines for un-sound practices, suspend dividends, deny re-quests to expand the number of branches or un-dertake new corporate activities, issue cease anddesist orders, remove managers or directors, andhold directors legally accountable for losses in-curred through illegal actions and willful contra-ventions of prudential regulations. The lack ofsuch powers often causes inaction.

RESTRUCTURING. Bank supervisors try to mini-mize losses by intervening at or near the point of abank's technical insolvency. Poor information, aninadequate legal framework, and lack of politicalwill often permit banks to stay open, multiplyingtheir losses, even alter they have lost their bookcapital many times over. In many developingcountries banks are subject to the same bankruptcyand restructuring procedures as nonfinancial cor-porations. While bank restructuring is under way,depositors may not have access to their funds. Inaddition, shareholders may retain an equity inter-est which they use to obstruct plans to recapitalizeand transfer ownership. If supervisors are to dis-pose of insolvent banks quickly, they must begranted authority to close a bank; to replace itsmanagement and directors; to dissolve existingshareholder interests; to purchase, sell, or transferbad assets; and to merge, restructure, or liquidateas necessary.

AUDITS. In some developing countries the au-thorities require no external audits of banks. Inothers audits are performed, but there are no clearguidelines on the standards to be used or on thescope, content, and frequency of the audit pro-gram. As a result audits are often inadequate andmisleading. Indeed, it is not uncommon for banksthat are known to be insolvent to be given cleanaudit reports. The prudential framework thereforeneeds to set minimum audit standards and to pre-scribe the form and content of the related financialdisclosures.

POLICY PRIORITIES AND POLITICAL WILL. To be ef-

fective, prudential regulation must be backed by apolitical commitment to supervision and enforce-ment. The supervisory body must be given clearpolicy goals, and it must be independent. Too of-ten in developing countries, supervisors are un-dercut by political interference. Such interferencewas blatant in the Philippines in the 1970s andearly 1980s, when supervisors feared reprisals if

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they attempted to discipline bank managers; ithappens in a subtler form in many countries. Onceaware of the scale of a banking problem, govern-ments often postpone the day of reckoning. Whenthey finally act, the cost of putting matters straightmay be far greater.

One sign of political commitment is the amountof resources given to the supervisory agency. If thegovernment means business, it must give the su-pervisory agency clearly defined responsibilitiesand then support that mandate with adequatefunds for staffing and training. Bank supervisorsmust be offered good compensation and careerprospects if they are to resist corruption and com-mand the respect of the institutions they super-vise. If the civil service cannot attract personnel ofthe required quality, it might be sensible to havebanks examined by private auditing firms and torecover the costs through a general levy on banks(with due care to avoid conflicts of interest).

Regulation of other financial institutions

Many of the principles of bank supervision andregulation also apply to other financial institutions,such as finance companies, insurance companies,pension funds, and mutual funds. A vital test indeciding on the extent of regulation is the numberand type of creditors. Financial institutions that donot have deposit-like liabilities to the general pub-lic need not be regulated as closely as those thatdo, because their deposits are not part of the pay-ments mechanism and their insolvency is not ascostly to the economy. The general provisions ofcommercial and company laws may therefore beadequate. Conversely, those financial institutionsthat are like banks in all but name (for example,some investment funds) should be just as closelyregulated and supervised (see Box 6.6).

INSURANCE. Insurance companies are usuallyheavily regulated in both industrial and develop-ing countries. These regulations have often beenintroduced in response to failures or fraud. Regu-lations typically provide for compulsory disclosureof information, government supervision with im-plicit or explicit guarantees of solvency, oversightof contract terms and conditions, controls on en-try, restrictions on investment portfolios, and rulesconcerning prices or profits. Regulation to pro-mote transparency is desirable, but many of thesemeasures limit competition and efficiency. For ex-ample, instead of insisting that a large share ofinsurance assets be placed in low-interest govern-

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Box 6.6 Investment funds in Egypt

The recent experience of Egypt illustrates the needfor adequate regulation and supervision of non-bank financial intermediaries that take depositsfrom the general public. Investment funds wereorganized in the mid-1970s to handle remittancesfrom Egyptian workers abroad and the savings ofsmall investors. These Islamic investment compa-nies paid profit-related returns, sometimes ashigh as 30 percent a year. They were not requiredto conform to banking regulations and did notcome under the supervision of the central bank.

Some of these institutions have faced increasingdifficulties in the past two years, and their finan-cial condition has deteriorated. Many had madelarge initial profits through trade finance not oth-erwise available to importers or through foreignexchange transactions in the parallel market.Some paid high dividends to earlier depositorsout of funds paid in by new depositors. Whendeposit growth slowed, some could no longer paythe promised high returns. To prevent further de-terioration, the government had to step in.

A law regulating the investment funds waspassed in 1988. It restricts deposit taking to joint-stock companies, imposes minimum capital stan-dards, and vests regulatory oversight with theCapital Markets Authority.

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ment bonds, portfolio restrictions should requirethat risks be adequately diversified. Life insuranceand other contractual savings schemes would thenbe more attractive to savers. Investments in sharesand corporate bonds have often been severely re-stricted, eliminating a potentially important sourceof long-term capital.

SECURITIES MARKETS. An appropriate regulatoryframework for securities is needed to increase in-vestor confidence. Regulation is unlikely to be sat-isfactory if left entirely to the market. The experi-ence of many countries shows that somegovernment guidance is desirable. In Hong Kong,for example, the stock market collapsed in 1973partly because of insider abuses. A new securitiescommission helped to restore confidence. It wasable to persuade brokers and underwriters that anorderly market which protected investors was intheir own long-term interests.

The regulations need to provide for adequatedisclosure of information about companies so thatinvestors can make informed decisions; they need

to license securities intermediaries and to curtailimproper activities in the market, especially theuse of privileged information by corporate officersand directors for their personal gain (insider trad-ing). These regulations are usually embodied inthe company laws that form the legal frameworkfor joint-stock companies.

If securities firms and the securities market as awhole are to perform efficiently, the firms must beprofitable and well capitalized and have profes-sionally trained staff. This does not happen auto-matically in an emerging securities market. Thegovernment has a crucial role. If minimum capitalrequirements are set too high in relation to the sizeof the market, new securities firms will not appear.But if firms have insufficient capital, they will notbe able to take on the risks of underwriting new

issues; nor will they be able to work as marketmakers (that is, to buy and sell shares for their ownaccount) and thus provide liquidity for the second-ary market. Brokerage rates, underwriting fees,and so on must be high enough for firms to attractand train staff and still leave their shareholderswith an adequate return on capital.

The regulation of companies and securities mar-kets is linked to important social issues. Promotingwidespread ownership of productive assets maybe one way to forestall greater concentration ofwealth and economic power. At the same time, itcan provide an income for the elderly at a timewhen industrialization and urbanization are break-ing down the extended family and the traditionaltransfer of income between generations.

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7/Develoin financial systems

What sort of financial systems will the developingcountries possess in twenty years? During the pasttwenty years, internationalization of markets and acommon set of forces have pushed the financialsystems of high-income countries into rough align-ment. The financial systems of developing coun-tries, however, remain quite heterogeneous. Mostdeveloping countries have begun to place greateremphasis on market signals, but some govern-ments will continue to intervene extensively incredit allocation and pricing, and some will con-tinue to rely on inflationary financing. As a resulttheir financial systems will remain shallow, withlittle long-term finance. Economic structures willcontinue to differ as well, with some countries re-maining primarily agrarian, others industrialized,some oriented toward domestic markets and im-posing tight controls on capital movements, andothers more oriented toward external markets andhaving fewer controls. Because of these differencesin developing countries' economic structures andapproaches to development, their financial sys-tems are likely to remain quite diverse over thenext two decades.

There are nevertheless pressures that are leadingmost developing countries to rethink the shape oftheir financial systems. One is the effort to applysome of the lessons learned from past interventionin financial markets, and another is the need toadapt to the decline in foreign capital inflows. A

third is the rapid changes that have occurred infinancial technology and banking practice. Thischapter considers the evolution of formal financialinstitutions and markets in response to these pres-sures. Chapter 8 will turn to the informal markets.

Financing investment

Certainly in the next decade, and perhaps in thenext two, the net flow of foreign capital to mostdeveloping countries is likely to be relatively small,regardless of how the present debt crisis is re-solved. This has important implications for finan-cial sector development. Developing countries willbe forced to rely primarily on domestic saving tocover the cost of investment. In the past, most re-lied heavily on foreign financing, and in manycountries external debt exceeds domestic debt.Moreover, practically all long-term credit was pro-vided by foreign loans. The decline in fundingfrom abroad will make living with a shallow do-mestic financial system and little long-term financedifficult. Unless countries develop their financialsystems, would-be investors will have to rely pri-marily upon retained earnings, and the funding oflarge projects, particularly ones that requirelonger-term finance, will be difficult.

Despite considerable differences in level of de-velopment and in investment rates, countries arequite similar in the composition of their capital

7.1 The structure of investment and the capital stock

Surprisingly, in relation to national income or CNP, thelevel and composition of investment (that is, thechange in capital stock) and the capital stock itself arequite similar among both low- and high-income coun-tries. Economies with very high rates of investmentand rapid growth (such as China, Korea, and Japan)have similar assets-to-GNP ratios, because rapidgrowth of the capital stock is balanced by rapid growthof output. In the centrally planned economies, assets-to-GNP ratios tend to be somewhat higher, owing tolower productivity and a large volume of inventories.Box table 7.1 presents capital stock estimates for a fewcountries for which such data are available.

On average, gross investment is about 20 percent ofGNP. Among developing countries, however, invest-ment rates vary considerably, ranging from less than 15

a. Adjusted from Goldsmith 1985 to make estimate consistent with those for other countries and with national accounts estimates.Source: Goldsmith 1985.

percent of GNP in Sub-Saharan Africa to well over 30percent in China. Machinery and equipment typicallyaccount for two-fifths of gross investment, and hous-ing, other buildings, and civil works for one-fifth each.Perhaps one-half of the total is thus invested in assetswith a life of fifty years or more, with the rest rangingmostly between ten and twenty years.

Because of substantial differences in asset life, thestructure of the capital stock is quite different from thepattern of investment flows: long-lived assets (primar-ily structures) account for about two-thirds of total re-producible fixed assets, medium-lived machinery andequipment for about one-fifth, and short-lived invento-ries, livestock, and consumer durables for the remain-der. The value of total reproducible assets is typicallyequivalent to 200 to 300 percent of GNP.

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stock and of gross investment flows. The repro-ducible capital stock is usually equivalent to two tofour years of gross national product (see Box 7.1).Long-lived assets, such as housing, commercialbuildings, schools, roads, and water supply sys-tems, account for the bulk of physical wealth in allcountries. The capital stock of the business sectoris surprisingly small in the aggregate. Fixed assetsin manufacturing and utilities are each equivalentto about 40 percent of GNP, fixed assets in com-merce are equivalent to 10 to 15 percent of GNP,and inventories are equivalent to 20 to 30 percentof GNP. In terms of gross investment flows and thedemand for financial services the business sectorlooms larger than its share of the capital stockmight suggest. Its capital stock is constantly beingremolded as new machinery replaces old, produc-

tion and distribution facilities are upgraded, andnew plants are built.

Business finance

Many of the financial policies pursued by develop-ing countries during the past several decades wereintended to redress perceived shortcomings of do-mestic financial markets. Two issues have been ofparticular concern: first, the supply of equity capi-tal and long-term finance and, second, the lack ofaccess to finance for certain classes of borrowers.In formulating policies to address these two con-cerns, however, countries have paid too little at-tention to the balance between risk and reward.

PArFERNS OF FINANCE. In the past, developingcountry governments relied on directed credit, ad-

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Box table 7.1 Estimates of the net capital stock in selected countries(percentage of GNP)

UnitedStates,

FederalRepublic

of Germany, Mexico, India, Hungary,Item 1978 1977 1978 1975 1977

Total reproducible assets 295 325 209 239a 405

Housing 87 106 64 67 73

Other structures 93 117 64 58' 135

Machinery and equipment 45 47 43 43 69

Inventories 33 21 20 34 70

Livestock 2 2 4 10 8

Consumer durables 35 33 13 27 51

Land 89 108 50 131 150

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Figure 7.1 Shares of medium- and long-termcredit in total credit outstandingfrom commercial banks and otherfinancial institutions in selecteddeveloping countries, 1970 and 1986

1970 0 1986

Portugal

Tunisia

Malaysia

Indonesia

Philippines

Burundi

Colombia

Morocco

Rep. of Korea

Cameroon

Côte d'Ivoire

Nigeria

Percent0 10 20 30 40 50 60 70

Note: Data are end-of-year shares. Data for Cameroon, Colom-bia, Korea, Malaysia, Nigeria, and the Philippines refer to com-mercial banks only. "Credit for equipment" has been used as aproxy for medium- and long-term credit in Korea. Data for 1970refer to 1974 for Caineroon, average of monthly shares for Nige-ria, and 1975 for Portugal; data for 1986 refer to 1985 for Camer-oon and Morocco, 1987 for Indonesia, and June 1986 for Nigeria.Data were not available for Indonesia and the Philippines for1970.Source: Central bank bulletins and World Bank data.

ministered interest rates, and foreign borrowing toensure that certain sectors received enough long-term financing. As Figure 7.1 indicates, however,in some countries commercial banks and other fi-nancial institutions have begun in recent years toextend more medium- and long-term credit. Inother countries, although banks provide little for-mal long-term finance, they do offer lines of creditand short-term loans that they roll over regularlyas long as the borrower is in good standing. Thistype of financing, acceptable to many firms, isused extensively as an alternative to long-term fi-nance in high-income as well as developing coun-tries. From the viewpoint of some borrowers, how-ever, short-term credit lines are imperfectsubstitutes for longer-term loans. They entail therisk of nonrenewal, a risk that may lead investorsto forgo certain projects.

Neither in theory nor in practice are there simplenorms of corporate financial structure. Financialtheorists have argued that the debt-to-equity ratiosof corporations are irrelevant if capital markets areperfect (see Box 7.2). More realistic theories, whichtake into account the costs of taxation, informa-tion, and monitoring and control, point to a varietyof tradeoffs between equity and debt. In practice,no single pattern of corporate finance and controlhas been found to be best.

It is nonetheless useful to distinguish amongfirms according to the variability of their earnings.Higher leveraging becomes riskier the more earn-ings fluctuate. The firms that can best afford to behighly leveraged are large and capital-intensiveand have highly predictable earningsutilities, forexample. In fact, modern finance got its start withinfrastructure projects such as canals, railways,and (later) public utilities. Today, much of the capi-tal for investment by public utilities in industrialcountries is provided by retained earnings, be-cause the basic infrastructure investments have al-ready been made. Thanks to the stability of theirincome and the long life of their assets, public utili-ties are usually able to raise what external financ-ing they do need by issuing bonds or other long-term debt.

In most developing countries, utilities and largetransport companies have borrowed heavily fromdomestic banks and from abroad and are nowamong the borrowers that are unable to servicetheir debts. This does not necessarily mean thatthey overborrowed, however. Most such compa-nies are publicly owned, and their products arefrequently priced too low to yield an adequate re-turn on their huge investments. If prices were set

Box 7.2 Corporate finance in theory and practice

Much attention has been paid in academic circles toidentifying the factors that influence corporate financialstructure and dividend policies. The seminal article byModigliani and Miller in 1958 demonstrated that in aworld with perfect capital markets a corporation'sdebt-to-equity ratio is irrelevant to the firm's marketvalue. In such a world the value of the firm is deter-mined entirely by its investment decisions, which cantherefore be completely separated from financing deci-sions. But markets are never perfect, and in practicefinancing decisions are not irrelevant. Subsequent de-velopments in corporate finance theory relaxed someof the explicit or implicit conditions underpinning theassumption of perfect capital markets.

Corporate taxes and the worldwide practice of taxdeductibility of interest payments provide an incentivefor debt finance. This incentive is weakened, however,by the direct and indirect costs of financial distress andbankruptcy, which are more likely to be encountered ina highly leveraged company. Information flows are notperfect, and this has an important influence on financ-ing decisions. In particular, managers have better infor-mation on a firm's performance and prospects than dooutside creditors and shareholders. By maintaining sta-

ble dividends, firms help to signal their confidenceabout future prospects. This may explain why firmscontinue to pay dividends even if they need additionalexternal finance or if taxes on capital gains are lowerthan those on dividend income.

Furthermore, since the interests of managers maydiffer from those of creditors and shareholders, the lat-ter group must incur costs in trying to monitor andaffect the way the company is run. Decisions on capitalstructure will be influenced by the ability of creditorsand shareholders to get the information they need inorder to exercise control over managers.

Recent theories have provided some plausible expla-nations for the differences in corporate financing pat-terns between the bank-based systems of Germanyand Japan, on the one hand, and the market-basedsystems of the United States and United Kingdom, onthe other. The two bank-based systems involve greatercorporate indebtedness (although the difference is notas large as suggested by reported accounting data).This may be explained by the close relations betweenbanks and industrythat is, by the ability of bankers toinfluence the decisions of managers.

to yield a higher return, retained earnings couldprovide most of the investment funds required.

Some large, capital-intensive firmsin steel, ce-ment, or petrochemicals, for examplehave a lesspredictable income stream. These firms cannot af-ford to be as highly leveraged as utilities andshould rely more on equity financing, much ofwhich can come from retained earnings if the firmsare profitable. If they are private and large enoughto be known to the public, these firms can obtainfunding by issuing equities or by finding foreignpartners. Where a particular industry accounts fora large part of a country's output, it would be de-sirable for the country to diversify its risk. It coulddo so by seeking equity funding abroad or by issu-ing debt instruments whose payments are linkedto the price of the commodity. Foreign lenderswould thus bear some of the risk of price fluc-tuations.

Many industries in this second group borrowedheavily during the 1970s to finance large invest-ment programs. Too heavily as it turned out: sub-stantial overinvestment left many of them unableto service their debts. As a result there has beenlittle investment in these sectors during the 1980s.Care must be taken that firms in these indus-

tries do not once again overinvest and becomeoverindebted when additions to capacity becomenecessary.

To foster sounder corporate financial structures,governments need to reconsider the policies thatgave certain classes of firms an incentive to becomehighly leveraged. Low prices and high costs leftmany state-owned enterprises dependent on ex-ternal finance for investment. Subsidized credit,tax biases against equity finance, the limited size ofcapital markets, and lax or ineffective bankruptcylaws encouraged firms to finance themselves byborrowing rather than by retaining earnings or is-suing equity. In some countries the knowledgethat the government was likely to help troubledfirms made it safer to rely on borrowing. In othersthe existence of financial-industrial conglomeratesin conjunction with weak supervision and regula-tion of banks worked to the same end.

Increasing the supply of long-term financebothdebt and equityremains a priority, particularly ininflationary countries and in countries that havedepended on foreign borrowing for most of theirlong-term funding. Macroeconomic stability is es-sential. Indexation can help to maintain somelong-term finance in inflationary economies, but it

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Ajmal Hosiery, a family-owned business in Lahore,Pakistan, was established by Malik Ahmad Din in 1947.He began with an abandoned hosiery mill and twoobsolete knitting machines. By the late 1950s the firmwas well-known across the country.

Malik's original scheme was to let his business growat a pace that would require no external financing, be-cause he was uncomfortable with the paperwork in-volved in getting a loan. Moreover, he feared that infor-mation given to financial institutions could be used bythe tax authorities. The company grew modestly dur-ing its first twenty years by plowing profits back intothe business. Sales increased from around 50,000 ru-pees (Rs) in 1947 to Rsl.3 million in 1969.

The company obtained its first bank financinganRs50,000 line of creditin 1969 when it executed itsfirst export order. This venture into the internationalmarket was not successful; it cost the companyRs100,000. The company reentered the export marketin 1972 but could obtain a line of credit of onlyRs200,000 from a local bank. Although there was clearpotential for exports, the firm needed working capitalfinance. In 1973 the State Bank of Pakistan introduced

its Export Refinance Scheme, which provided cheapfinancing to eligible exporters through the commercialbanking system. The firm could not exploit the schemefully because banks thought its collateral inadequate.Nevertheless, the scheme helped the company to reachsales of Rs5.0 million in 1979, by which time its bankcredit line amounted to Rsl.3 million.

The firm had always relied solely on internally gener-ated funds to finance investment. Consequently, in-vestment in plant and equipment had not kept pacewith sales. In 1976, however, it obtained a long-termloan of Rsl.0 million to expand its capacity; the lenderwas the Industrial Development Bank of Pakistan.

The company has grown dramatically during the1980s. It has used the government's enlarged exportfinancing scheme and has also obtained term financing(in 1980, 1984, and 1988) for modernizing its plant andequipment. Sales grew fivefold between 1980 and 1988.In 1989-90 the firm plans to reach sales of Rs90.0 mil-lion, a figure three times higher than its 1988 sales ofRs30.0 million and 1,800 times its sales of Rs50,000 atinception in 1947.

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is a poor substitute for price stability. Allowing in-stitutions to charge interest rates that reflect thehigher risks of longer-term lending will increase itssupply, as will improvements in legal and account-ing systems that increase lenders' ability to moni-tor and control their clients. Relatively riskyprojects should be financed with equity capital,where repayment is linked to profits; long-termloans with fixed returns are unsuitable for suchprojects.

ACCESS TO FINANCE. Many governments havesought to improve the access of smaller firms tofinance, partly for social reasons and partly be-cause such firms are often thought to be the mostdynamic part of the economy. Although small-scale manufacturing, service, and commercialfirms are generally less capital-intensive thanheavy industry or housing and thus have consider-ably smaller investment needs, they should haveaccess to credit if they can use it more productivelythan larger borrowers. As Box 7.3 illustrates, creditcan allow a small firm to invest and grow.

Because small firms have little name recognition,they can neither borrow abroad nor issue equity.They depend for external funding on trade creditsfrom other firms or on loans from financial inter-

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mediaries. Bankers everywhere, however, are re-luctant to lend to small borrowers. First, they mayfind it uneconomical to lend the small sums re-quired. Second, it is difficult to judge the risk, par-ticularly when an investment project is a new ven-ture. Small firms often lack a track record andrarely keep reliable accounts. Third, small borrow-ers often lack adequate collateral.

In developing countries, bankers' reluctance tolend to small firms has been compounded by otherfactors. Financial policies have left small firms un-able to compete for credit on the same terms aslarger firms. Most directed credit programs havediscriminated against small borrowers. Interestrate ceilings have prevented lenders from raisinginterest rates to compensate for additional risk andhigher costs. And small firms have less politicalinfluence: lenders know that governments are un-likely to intervene on behalf of a failing small firm.

In short, the policies that led to overleveragingby many large firms have also limited access tocredit for small borrowers. Changing those policieswill improve the flow of finance to small firms. Inaddition, measures that improve the links betweenformal and informal financial markets (discussedin Chapter 8) would serve the same purpose.

Financial innovations that secure loans by means

IBox 7.3 The financial history of a Pakistani firm

other than collateral are of particular benefit tosmall firms. By renting buildings and leasingequipment, small firms can acquire the use of as-sets without borrowing. With the development ofsecurities markets, venture capital is more likely toappear as a source of finance for risky newprojects. In the past, governments have reliedupon development finance institutions for venturecapital, but the risks for them were at least as greatas for commercial banks.

MONITORING AND CONTROL. In their efforts to in-crease the supply of equity capital and long-termfinance, governments have paid little attention tothe possibility of reducing risk by enabling lendersto monitor and control the use of financial re-sources. Monitoring can be done by banks wherethey are the dominant lenders (as in Germany andJapan) or by specialized institutions, such as creditrating agencies and stockbroking firms, where fi-nancial markets are more important (as in theUnited States and the United Kingdom).

The experience of Germany and Japan suggeststhat high leverage can be compatible with success-ful industrialization. For such an approach to beeffective, lenders must have the confidence of, anda strong commitment to, their borrowers. This inturn calls for the banks to maintain long-term rela-tionships with firms. The banks' involvement maytake different forms, such as holding equity posi-tions or having seats on boards of directors, butextensive consultations with managers are crucial.Banks must also have the means to take swift cor-rective action when necessaryto replace man-agers, restructure operations, or foreclose on loansif need be.

Close ties between industry and finance haveworked well in some countries, but in others, es-pecially in Latin America, they have not. In severaldeveloping countries, small groups of business-men have used the funds of banks under their con-trol to create industrial conglomerates. By elimi-nating information and control problems, theexistence of such groups permitted the financingof some profitable, although more risky, ventures.However, groups have used their control of fi-nance to exclude potential competition. They havecaptured economic rents for their owners by pass-ing on cheap credits to related firms. And theyhave rescued and supported fundamentally unvia-ble businesses. When speculative ventures back-fired or industrial companies suffered losses,group banks continued to provide funding longafter the ailing firms had become insolvent. For

close ties between industry and finance to work,regulators must prevent banks from lending im-prudently to related firms.

Household finance

Demographic trends will affect the financial sys-tems of developing countries. As the share of thepopulation living in urban areas increases, and asincomes rise, more people will live apart from therest of their family, and more will live past retire-ment age unsupported by their children. Thesechanges will increase the demand for credit to fi-nance housing and for certain types of financialassets.

Housing is a major investment in all countries: itaccounts for between 20 and 30 percent of a coun-try's capital stock (Box 7.1). In rural areas muchhousing is built by the owner out of locally avail-able materials; the cash expenditure may be rela-tively small and spread out over a long period. Inurban areas and particularly for middle-class hous-ing, the expense of building or buying a house islarge relative to income and incurred all at once.The rapid growth of the urban population of mostdeveloping countries will almost certainly lead to agreater demand for mortgage finance. Most fami-lies require a loan to buy or build a middle-classhouse. The need for mortgage finance in many de-veloping countries is demonstrated by the com-mon sight of abandoned, half-completed struc-turesa significant waste of resources in view ofthe share of housing in total investment.

Some governments provide concessional financefor housing to preferred borrowers, often civil ser-vants, but others discourage mortgage lending inorder to free resources for investment in industry.As urbanization proceeds, it will be important forgovernments to recognize the scale of housing in-vestment, to improve laws concerning the use ofhousing as collateral, and to integrate housing fi-nance on a nonpreferential basis with the remain-der of the financial system (see Box 7.4).

As more of the population will want and be ableto make provision for retirement, there will be anopportunity to develop contractual savings institu-tions, such as life insurance companies and pen-sion funds. Individuals with greater wealth willwish to hold more diversified portfolios. Invest-ment in housing and contractual savings both pro-vide some diversification, but in a stable macroeco-nomic environment households are also likely todemand securities with greater yields (and corre-spondingly greater risk) than bank deposits. In

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Box 7.4 Housing finance

The formal financial sector in most developing coun-tries finances only a small share of housing investment.Mortgage credit from the formal sector was 28 percentof all housing investment in a sample of eleven devel-oping countries, compared with more than 60 percentin OECD countries. The difference partly reflects theshallowness of financial systems in developing coun-tries. Years of financial repression not only have mini-mized the role of the formal sector in housing finance,but have raised housing prices because negative realinterest rates favored investments in real assets. Inanother sample of eleven developing countries theaverage ratio of house value to annual household in-come was 5.5, compared with 3.0 in five high-incomecountries.

Several other factors explain the lack of smoothlyfunctioning markets for housing finance in developingcountries. Countries have often given little priority to

Lhousing

finance. Because housing is a large invest-ment, it requires long-term finance, and in many coun-

tries inflation, interest rate controls, and the instabilityof financial markets have deterred long-term lending ofany kind. Inadequate legal systems diminish the valueof housing as collateral and hence also diminishlenders' willingness to provide mortgage finance. Andpolicymakers have been concerned that increased fi-nance for housing might drive the cost of housing evenhigher.

Shelter is a basic human need. Secure ownership of ahouse can raise the welfare of the household that livesin it. Moreover, when a house is purchased through amortgage, the buyer becomes, in effect, a contractualsaver: the buyer is paying the lender for the right tolive in the house while saving for its purchase. Andwhen the title to a house can be easily transferred, thehousehold gains a relatively riskless form of collateral.Furthermore, a housing loan, which is fungible withother household resources, may provide the funds thatwould permit the household to undertake a productiveinvestment.

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a growing number of developing countries, salesto individuals of corporate securities and sharesin mutual funds have begun to increase. As macro-economic stability is restored in other countries,investors' interest in securities will continue togrow.

Building financial institutions and markets

In planning for the future it is important to have aclear and consistent objective for finance. The keyobjective of the financial system is the provision offinancial services at prices that reflect their cost.The financial system can also be used in modera-tion for other objectives. In the past, however, de-veloping country governments have tried to do toomuchusing the financial system to finance thegovernment budget deficit, redistribute income,and serve as a tool in implementing their develop-ment strategies. Multiple and often conflicting ob-jectives have impaired the financial system inmany developing countries.

Financial markets are never perfect. In allocatingcredit they can make two sorts of mistakes: fund-ing low-yielding projects and failing to fund high-yielding ones. In the early stages of development,developing country governments, fearing that thecosts of failing to fund good projects were likely tobe high, intervened to direct credit. Perhaps thatassessment was sound at the time, but experience

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has since revealed too many errors of the firstkindfunding low-yielding projects. With time,economies have become more complex, informa-tion flows have improved, and financial managershave become more skilled. In most countries bothsorts of error can be minimized by leaving moredecisions to a diverse and competitive financialsystem that responds to market signals. The pri-mary role of government then shifts to makingmarket signals more meaningful and, in particular,to preventing its own actions from distortingthem.

On occasion the government may have a role toplay as a promoter of financial institutions andmarkets in order to create a diversified and com-petitive financial system. Many high-income anddeveloping countries have used fiscal incentives tofavor particular institutions and markets. Such in-centives may be justified to encourage financial di-versity, particularly if the existing markets aredominated by large banks and are uncompetitive.Fiscal incentives, however, should be used onlymoderately, should have clear objectives, andshould be withdrawn once those objectives areachieved. In the long term, countries should optfor regimes that do not favor one type of instru-ment or institution over others.

Countries must also choose the range of permis-sible activities for financial institutions. Banks inmany high-income countries are operating increas-

ingly as universal banks, engaging in commercialas well as investment banking activities. Argu-ments in favor of universal banking include sav-ings in overhead costs, better information aboutclients, and greater diversification of risks. The ar-guments against are mostly prudential: universalbanking could lead to undue exposure to risk and aconcentration of economic power. As discussed inChapter 6, however, prudential regulation can dealwith these drawbacks.

The banking sector

The banking sector in developing countries mustconfront several difficult issues. The most pressingis that many banks are insolvent and must be re-structured. This problem was discussed in Chapter5. Another is that wide-ranging intervention in thefinancial sector must gradually give way to sys-tems that provide services in response to marketsignals. This, in turn, calls for more competitionand better management.

INCREASING COMPETITION. Commercial (or de-posit) banks hold between 50 and 90 percent of theassets of all financial intermediaries in most devel-oping countries and will continue to be at the heartof their financial markets for the foreseeable fu-ture. In many countries these markets are domi-nated by a few large banks. The lack of effectivecompetition is not so much due to monopoliesbased on economies of scale as to restrictions oninterest rates, on product innovation, on branch-ing, and on the entry of new institutions. Greaterfreedom for banks to respond to market signals, tochoose their own customers, to set interest rates,and to determine the location of branches wouldstimulate greater competition. The creation of newbanks and other institutions should be constrainedonly by the prudential regulations discussed inChapter 6. Competition also means allowing failedinstitutions to go out of business. Allowing foreigninstitutions to open branches, start joint ventureswith a local institution, or provide specialized ser-vices from abroad can be another source ofcompetition.

Although economies of scale are not great in fi-nance, it may not be possible in small economies toensure a competitive market for every financialproduct. A few commercial banks supplementedby a postal savings bank may be all a small econ-omy can support. Even in larger economies, finan-cial markets are often uncompetitive. In these itshould at least be possible to promote competition

in big product markets, such as wholesale banking(loans to larger borrowers) and deposit taking incities. This can be done, even when the creation ofanother big commercial bank would not be justi-fied, by encouraging the development of special-ized intermediaries. A postal savings bank, for in-stance, would extend financial services to newclients and foster competition for deposits; financeand leasing companies would spur competition inthe market for loans.

To improve competition and efficiency, somesmall countries have opened their markets to for-eign banks or have encouraged joint ventures be-tween foreign and domestic institutions. Manysmall and medium-size countries could buy thespecialized financial services they need (such asreinsurance, swaps, and forward contracts) fromabroad. Small, specialized institutions and foreigncompetition can force even big oligopolistic banksto behave competitivelyalthough not necessarilyacross the full range of financial services.

As the demand for financial services grows,countries will need to encourage the developmentof nonbank financial intermediaries and securitiesmarkets in order to broaden the range of servicesand to stimulate competition and efficiency. Somecountries have already made considerable prog-ress toward more diversified financial systems. InMalaysia, for example, a wide variety of institu-tions and markets are operating in an environmentof macroeconomic stability. Brazil and other LatinAmerican countries have had some success in in-stitution building, although high and volatile infla-tion continues to undermine financial develop-ment. In recent years several developing countrieshave broadened their money and capital marketsand created new intermediaries, such as leasingcompanies and contractual savings institutions.Most countries, however, are still at an early stageof financial development.

IMPROVING MANAGEMENT. Poor managementhas contributed to banks' difficulties in manycountries. A 1988 study of bank failure in theUnited States concluded that management weak-nesses, especially among smaller banks, were animportant factor in 90 percent of the cases ana-lyzed. Improvements must be made in the skills ofmanagement and in the banks' internal systems,particularly if the banks are to survive in the morecompetitive markets of the future (see Box 7.5).Many management tasks are similar to those ofbank regulators and supervisors, as discussed inChapter 6. Indeed, banks with large branch net-

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Box 7.5 Bank modernization: Indonesia's experience

Indonesia began to deregulate its financial sector in1983 and enacted a second set of measures in 1988.These signaledat least potentiallya fundamentalshift from a highly protected state banking oligopoly toa broadly competitive financial market. In a competi-tive environment, state banks would need to improveservice, productivity, product innovation, and market-ing skills. They would also need to introduce better riskmanagement, because competitive pressures wouldnarrow lending spreads and increase balance sheetvolatility.

Bank Negara Indonesia 1946 (or BNI) is the largest ofIndonesia's five state commercial banks, which to-gether accounted for 71 percent of commercial bankassets in 1987. BNI's board of managing directors re-acted to the changing environment by adopting an am-bitious modernization program with the support of aninternational consulting firm. This program was giventop priority from its inception in 1983 to the end of1988.

The program had an institutional component and atechnology component. The institutional componentincluded an attempt to identify business opportunitiesfollowing deregulation; a reorganization to refocus thebank on its marketplace priorities, reinforce risk man-agement, and speed management decisions; man-power management programs to improve the evalua-tion, deployment, development, and motivation ofstaff; and a comprehensive revamping of the bank'sprocedures for managing its assets and liabilities. Theproject was accompanied by a massive effort to trainstaff.

The technology component was the full-scale auto-mation of the bank's retail and wholesale functions. Inpreparation for automation, BNI greatly simplified itsprocedures. To attract and retain the necessary techni-cal expertise, it paid higher salaries.

It is too soon to judge the overall success of BNI'sreforms. BNI's competitors have begun or announcedsimilar programs of their own.

works internalize a considerable part of the super-visory function.

The internal systems of banks in developingcountries have some common problems. Manybanks are operated without the benefit of a formalplanning process. Financial plans and budgetsmay not exist, and little is done to control costs. Asa result institutions react to, rather than anticipate,changes in the external environment. This makesthem vulnerable to sudden change.

The information available to management is nei-ther timely nor complete. At one bank in Nepal,unreconciled differences in interbranch accountshave existed for years and are equal to the whole ofthe bank's capital. Without good information, it isdifficult to take corrective action on credit exten-sions, problem loans, or off-balance-sheet risks.Commercial banks in many countries have lax ac-counting and auditing procedures and continue toaccrue income long after loans are nonperformingand recovery has become doubtful. Sometimesnew lending is used to conceal debt servicing prob-lems; overdraft facilities are particularly vulnerableto such abuse.

Poor management is most often reflected in im-proper lending. A lack of written lending policiesmakes it more difficult to manage risk; withoutwritten policies, senior managers find it hard tocontrol the lending of their middle managers. Ex-

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cessive concentration of risk is common. Too manyloans to one borrower, an affiliated group, or bor-rowers in one industry means that the quality ofthose loans could be jointly damaged by a singlefactor. Banks in Texas are an example of excessiverisk concentration. When the price of oil was high,Texas banks were among the nation's most profit-able; when the price fell after 1982, they sustainedlarge losses, and several of the leading banksfailed.

Excessive lending to related firms has proved aserious problem in Chile, Kenya, Turkey, andother developing countries. In Spain, the Rumasagroup contained twenty banks and more than 700companies and used the twenty banks to financethe related firms. When the firms experienced dif-ficulties, the banks became insolvent. In the after-math of the crisis, it was discovered that 400 of thefirms were phantom companies created to borrowmoney, conceal the use of funds, and maintain theappearance of financial health.

Poor risk selection is the source of many problemloans. This includes advancing an excessive pro-portion of the required capital without demandingan adequate infusion of the borrower's own funds.Speculative loans based on the appreciation of as-set prices can also be dangerous. In Malaysia, a fallin property prices and a rise in the debt servicingcosts in the early 1980s adversely affected loans to

those speculating in real estate. In Kuwait, a col-lapse in the securities markets, together with thesystem of settlement by postdated checks, createdserious problems for banks that had extendedcredit against securities and real estate.

One of the most important tasks of managementis to train and motivate staff. The most successfulinternational commercial banks appear to be thosewith the best in-house training programs, wheretop managers train and assess future managers.Commercial banks in developing countries shoulddraw on the experience of banks in other countriesin devising training programs for their own staff.Countries such as Guinea, Hungary, and Koreahave established joint venture banks with foreigncommercial banks in order to transfer skills morerapidly (see Box 7.6).

Accountability is a problem for many banks indeveloping countries because organizational struc-tures are overly complicated and responsibilitiesare poorly defined. To improve accountability,commercial banks in high-income countries aremaking greater use of independent profit centers.Each branch is managed as a profit center, as areother units supplying services such as leasing andconsumer credit. Profit centers are judged and re-warded on the basis of the profits they generate.Separately managed cost centers (for example,check processing) have to be judged on the basis ofunit costs because there is no way for the market to

evaluate their services. Only the head office or cer-tain major subsidiaries qualify to be investmentcenters and thereby have a say in the use ofprofits. Credit ceilings are used to limit the author-ity of branch managers and to prevent undue loanconcentration on the books of a branch. Largeloans require approval at higher levels and are car-ried on the books of the head office. Internal pricespermit the efficient transfer of resources withoutundermining the profit incentive of each branch.The profit center approach has much to recom-mend it. In practice, however, it is complicated andrequires skill and experience to work well.

Nonbank financial institutions

In most developing countries, nonbank financialinstitutions (finance companies, development fi-nance institutions, investment banks, mutualfunds, leasing and factoring companies, insurancecompanies, pension funds, and so on) are a rela-tively small part of the financial system. Countriessuch as Brazil, India, Jordan, Korea, and Malaysia,however, do have a large nonbank financial sector.Sometimes, stringent bank regulation or favorabletax treatment gives nonbank intermediaries astrong competitive edge. In Korea, for example,finance companies have grown rapidly since 1982largely because they have greater freedom thanbanks in setting interest rates.

Box 7.6 Banks in Guinea

Like most African countries at independence, Guineahad a commercial banking sector that was dominatedby a few foreign banks. In 1960 it established the Bankof the Republic of Guinea as a socialist monobank. Thiswas later divided into four specialized banks, eachdealing with one function or a single category of cus-tomer. The management of the banking system wascentralized, and the four specialized banks were, inpractice, departments of the central bankthat is, thegovernment. Credit was allocated in accordance withfive-year plans. (Credit to the private sector was pro-hibited during 1965-79.) The banks confined them-selves to providing working capital for state enter-prises, which in most cases meant financing theirrecurring losses. By 1985, 80 percent of the banks'loans were irrecoverable. The banks were grossly over-staffed with badly trained employees and managers.Discrepancies in interbank claims amounted to 10 per-cent of their combined balance sheet.

A change of government and a new developmentstrategy in 1984 gave a larger role to market forces andprivate sector initiative. The central bank was strength-ened with foreign technical advisers, the specializedbanks were liquidated, and a currency reform and alarge devaluation were implemented. Three new com-mercial banks started business, with foreign participa-tion. Foreign workers now account for about 7 percentof staff, but their number will be gradually reduced asnationals finish their training. The total personnel ofthe new system is a quarter of the old. Intermediationmargins have initially been high, because there hasbeen little competition among the banks, and the de-mand for credit has expanded rapidly as the economyhas recovered. The banks also say that their nonper-forming assets are substantial (one-third of their port-folio), so further improvements in the legal frameworkfor loan recovery may be needed.

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DEVELOPMENT FINANCE INSTITUTIONS. The mostcommon type of nonbank intermediary in devel-oping countries is the development finance institu-tion (DFI). Most are public or quasi-public institu-tions that derive much of their funding from thegovernment or from foreign assistance. Originally,they were intended to provide small and medium-size enterprises with the long-term finance that thecommercial banks would not supply. During the1970s that mandate was broadened to include thepromotion of priority sectors. Using governmentfunds, DFIs extended subsidized credit to activitiesjudged unprofitable or too risky by other lenders.In practice, the DFIs found it difficult to financeprojects with high economic but low financial ratesof return and remain financially viable at the sametime. The DFIs' difficulties have been discussed inChapter 4. Today many of them are insolvent. Ifthey are to remain in operation, they will have tobe restructured.

DFIs face competition from commercial banks,leasing companies, and other sources of long-termand equity finance. The procedures of other insti-tutions are often speedier and less bureaucratic.Moreover, commercial banks offer much morethan just long-term loans. If DFIs were to chargemarket rates for their services, many would soonlose their customers. Where other institutions offercompeting services and the existing DFIs are finan-cially and institutionally weak, the best course is toclose the DFIs or merge them with sounder institu-tions. There is no reason to close DFIs that canmobilize their own funds and are profitable atmarket interest ratesalthough it might be sensi-ble to merge them with càmmercial banks,which thereby would gain expertise in long-termfinancing.

Monitoring and control of borrowers has posedparticular problems for DFIs. Because they providemostly long-term loans, they do not have the sameday-to-day contact with customers as commercialbanks. And the narrow specialization of DFIs hasmade it difficult for them to diversify their risks;they have been particularly vulnerable to fluctua-tions in the business cycle. Merger with commer-cial banks would help to solve both problems. Al-ternatively, DFIs might expand their range ofservices within the constraints of their institutionalcapabilities and professional skills. Activities po-tentially suitable for DFIs include consulting andleasing; the skills involved are similar to those re-quired by DFIs' existing activities.

The operations of DFIs need to be strengthened

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in the ways already outlined for commercial banks.The DFIs that are to remain in the public sectorneed professional boards of directors, trainedmanagement, and competitive salaries. They alsoneed to place greater emphasis on loan appraisaland recovery.

To attract more funds from the public, DFIs needto charge market rates on their loans. Borrowinglong-term funds will be feasible only if there is amarket for long-term finance (this is discussed fur-ther below). Some DFIs have acquired equity hold-ings. Selling the shares of firms that have becomeprofitable could free resources to finance new ven-tures and increase the supply of securities in localcapital markets. To the extent that DFIs continue tolend foreign resources, better management of for-eign exchange risk will be necessary. In manycountries clients of DFIs and, in turn, the institu-tions themselves were badly affected by sharp cur-rency devaluations. If foreign exchange risk is tobe passed on to borrowers, loans should go only tothose with foreign exchange revenues or hedgingopportunities.

Past experience has shown that DFIs cannotachieve all of their objectives and remain finan-cially viable. If they are to lend for socially attrac-tive but financially dubious purposes, they shoulddo so as agents of the government with no risk tothemselves. In some countries they have usedmanaged funds to this end.

LEASING COMPANIES. Smaller and less well-established enterprises find leasing companies anattractive source of long-term finance. By leasingplant and equipment, small firms can avoid therequirements for collateral that often prevent themfrom obtaining long-term finance for a direct pur-chase. Of course, leasing depends on the ability torepossess leased assets (in fact, as well as in princi-ple) and on the existence of markets for usedequipment. The share of leasing in capital forma-tion (excluding building and construction) in se-lected developing countries ranges from 0.5 per-cent in Thailand (1986) to 8 percent in Korea (1985)to 14 percent in Malaysia (1985). This compareswith shares of 8 percent in Germany, 9 percent inJapan, and 20-28 percent in five other industrialcountries.

Governments can encourage leasing by ensuringthat tax systems do not discriminate against thistype of financing and by amending laws that areunclear or unfavorable (as they are in Thailand).The more successful leasing companies in develop-

ing countries have been joint ventures between na-tional institutions (commercial as well as financial)on one side and overseas leasing companies orbank groups with experience in leasing on theother.

VENTURE CAPITAL COMPANIES. Venture capital istemporary start-up financing in the form of equitycapital or loans, with returns linked to profits andwith some measure of managerial control. Venturecapitalists expect losses on some ventures to begreater than with traditional financing, but theyinvest because they think that greater than normalreturns on others will more than make up for thoselosses. Venture capital is ideally suited to projectsinvolving uncertainty, poor information, and lackof collateral. It is therefore an alternative to financefrom DFIs. It is clearly not suitable for every coun-try, however, It requires an entrepreneurial classand an environment conducive to private sectorinitiatives. A source of long-term investable re-sources is also necessary. And an active secondarymarketeither a secondary stock exchange with

less demanding listing requirements or an ade-quate network of business contactsis essential sothat investments can be sold.

CONTRACTUAL SAVINGS INSTITUTIONS. Contrac-tual savings institutions (life insurance companies,occupational pension schemes, national providentfunds, and funded social security systems) havelong-term and generally predictable liabilities.They are potentially good sources of finance forinvestment in corporate bonds and equities. Inhigh-income countries these institutions are themain suppliers of long-term finance. They providesavers with opportunities to diversify risk andwith the benefits of investing in a portfolio selectedby professional investors.

A major impediment to the development of con-tractual savings as a source of long-term corporatefinance has been the preemptive use of these fundsby government. In many countriesBrazil, Co-lombia, Ecuador, India, Kenya, and Malaysia, forinstancegovernments require contractual sav-ings institutions to invest a significant part of their

Compulsory pension funds have contributed signifi-cantly to the supply of long-term investment funds inSingapore and Chile. In Singapore the Central Provi-dent Fund receives exceptionally high mandatory con-tributions from employers and employees. Such contri-butions rose to 50 percent of salaries in 1984, beforebeing temporarily reduced to 35 percent in 1986. Fundsare mostly invested in government bonds, but employ-ees are now allowed to use their provident fund sav-ings to buy housing. At retirement, employees receiveeither a lump-sum payment equivalent to their contri-butions plus the accumulated return on the assets ofthe fund or an annuity determined by their life expec-tancy at retirement. The accumulated resources of theprovident fund are now equivalent to about 65 percentof GNPa substantial amount of very long-term sav-ings (with average maturity between twenty-five andthirty years), which will continue to grow.

Chile restructured its pension system in 1981. Contri-butions are compulsory but are privately managed bycompetitive firms. Employees can choose among plansand switch at their discretion. Thus managers who per-form better can expect to gain accounts. Compulsorycontributions are set at 10 percent of salaries. Benefitsbased on life expectancy are determined at retirement;the minimum pension is 85 percent of the legal mini-mum wage, or about 40 percent of the average wage.

In the first eight years of the new system, the totalvalue of assets grew to about 18 percent of GDP. Two-thirds of the funds are invested in government securi-ties, one-quarter in mortgage bonds, and the rest inshares and other investments. Initially the earnings onassets were very high (owing to high real interestrates), but they are now about 4-5 percent in realterms.

The fraction of the portfolio invested in equity shareswas negligible until 1985, because companies that hada dominant shareholder did not qualify for pensionfund investment. Only with the denationalization of anumber of large state enterprises (mainly utilities) andsome further relaxation of prudential standards has itbecome possible for the pension managers to invest incorporate equities. Investment in corporate equities islikely to remain a small part of assets, not because ofregulation, but because securities are in short supply.Even after the denationalization program, the value ofall corporate stock is only about 25 percent of GNP; thevalue of pension assets will grow to about 100 percentof GNP as the system matures.

The main issue for both funded and pay-as-you-gosocial security systems is the rapid increase in life ex-pectancy. This will require adjustments in the contribu-tion rates, retirement benefits, or the retirement age.

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I Box 7.7 Pension funds as a source of term finance

resources in government securities or programswith low returns in the social sectors. (Sometimescontractual savings institutions hold governmentsecurities because they lack alternative investmentopportunities,)

Although a government with a deficit needsfunds from a source other than the banking sys-tem, it does not necessarily need long-term fi-nance. Furthermore, the government's legitimateconcern with the soundness of the assets in whichpension funds invest need not preclude invest-ment of those funds in the private sector. Gov-ernments in high-income countries have enactedprudential rules for pension and insurance invest-ments, and these rules allow pension funds to in-vest in private sector activities. Chile and Singa-pore have moved in recent years to allow thepension authorities to invest in other than govern-ment securities (see Box 7.7).

Because pension and insurance institutions arelikely to be relatively large and therefore able toafford professional management, these managersare able to play a role in the monitoring and controlof the firms in which they invest. Governmentscan encourage the industry to develop by creatinga regulatory framework that seeks a proper bal-

ance between safety and real returns and by foster-irig greater competition.

Securities markets

Well-developed securities markets enlarge therange of financial services. Short-term money mar-kets provide competition to the banks in supplyingcredit to larger corporations, and under appropri-ate conditions capital markets can provide long-term finance to government and large firms.

MONEY MARKETS. The development of securitiesmarkets usually starts with trading in a short-termmoney market instrument, often a government se-curity. Other money market instruments are inter-bank deposits, bankers' acceptances, certificates ofdeposit, and commercial paper issued by nonfi-nancial corporations. Money markets provide anoninflationary way to finance government defi-cits. They also allow governments to implementmonetary policy through open market operationsand provide a market-based reference point forsetting other interest rates. Furthermore, moneymarkets are a source of funds for commercialbanks and other institutions with limited branch

Box 7.8 Capital markets in India

In the 1950s India's capital markets helped to mobilizefinancial resources for the corporate sector. The impor-tance of these markets then diminished, because subsi-dized credits were available from commercial and de-velopment banks, equities had to be issued at adiscount substantially below market value, the capitalmarket lacked liquidity, and investor safeguards wereinadequate.

A reform of the Foreign Exchange Regulations Act inthe early 1970s limited the expansion of foreign-ownedand foreign-controlled companies. In response, manycompanies decided to become Indian companies. Thisled to the issue of substantial quantities of companyshares at low prices. The market's revival continued inthe 1980s, as various measures were introduced tostimulate both demand and supply. Incentives for eq-uity and debenture issues included reducing the corpo-rate rate of tax for listed companies and fixing the per-mitted interest rate for debentures above that for fixeddeposits but below that for bank loans. The govern-ment also authorized the use of cumulative, convert-ible preference shares and equity-linked debenturesand gave generous fiscal incentives to investors.

The growth of the Indian capital markets has beenimpressive. Equity market capitalization on the Bom-

bay exchange increased from $11.8 billion to $19.4 bil-lion between the end of 1980 and 1987; average capitali-zation ratios remained roughly equal to 6.5 percent ofGNP. The number of listed companies on all exchangesincreased from 2,114 in 1981 to 6,017 in 1987. Newissues of debentures also multiplied. However, therewere also abuses, such as the use of misleading pro-spectuses and insider trading. In addition, the process-ing of new issues, which were heavily oversubscribedbecause of their low prices, was plagued by delays inshare allocation.

In April 1988 the Securities and Exchange Board ofIndia was established to oversee and regulate the mar-kets. In August 1988 a credit rating agency was estab-lished to grade capital issues. In January 1989 pro-posals were published regarding the appointment ofmarket makers offering bid-and-asked quotations, theresponsibility of stockbrokers for vetting companies be-fore listing, the opening of stockbroking to banks andother financial institutions, and the creation of a sec-ond-tier market for smaller enterprises, with less oner-ous listing requirements. The measures were intendedto improve market liquidity and transparency and toprovide adequate protection to investors.

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networks, including foreign banks and leasing andfactoring companies. By enabling large corpora-tions to issue short-term securities in the form ofcommercial paper, money markets make the cor-porate loan market more competitive and reducethe market power of large commercial banks. Mea-sures to promote the growth of money marketshave been among the most successful financial re-forms in high-income and developing countriesalike in the 1980s.

One such measure is to issue government securi-ties at market interest rates. The reluctance of fi-nance ministries to pay market rates on their debtis usually the biggest obstacle to the developmentof money markets. Governments also need to re-move regulatory obstacles, such as the rules thatprevent banks from issuing certificates of depositor corporations from issuing commercial paper.The publication of clear rules of conduct for marketparticipants is essential.

CAPITAL MARKETS. Capital markets provide long-term debt and equity finance for the government

Average market capitalization is a five-quarter average of the total value of listed stock, based on year-end data, assuming constant exponentialgrowth during the year.

Turnover ratio is the value of stocks actually traded as a percentage of the average total value of listed stock.Bombay exchange.

Source: IFC.

and the corporate sector. By making long-term in-vestments liquid, capital markets mediate betweenthe conflicting maturity preferences of lenders andborrowers. Capital markets also facilitate the dis-persion of business ownership and the reallocationof financial resources among corporations andindustries.

In mature economies, new share issues havebeen overshadowed in recent years by the retire-ment of existing equity. In the United States andthe United Kingdom, as a result of mergers andtakeovers and the spread of share repurchase pro-grams, net new equity finance has been negativefor several years. In earlier periods, however, secu-rities markets were far more important as a sourceof finance. From 1901 to 1912, for example, newstock issues provided 14 percent of corporate fi-nancing in the United States. In several develop-ing countries, including India and Korea, the secu-rities markets have raised impressive amounts ofnew equity and bond finance in recent years (seeBox 7.8).

Several developing countries have made great109

Table 7.1 Equity market indicators, 1987

Country

Average marketcapitalizationa

(percentageof GNP)

Turnover rati&'(percentageof average

capitalization)

Number ofcompanies

listed

High-income countriesJapan 92 93 1,912United Kingdom 80 72 2,135United States 58 93 7,181

Germany, Fed. Rep. of 21 161 507France 18 56 650

Developing countriesJordan 60 15 101

Malaysia 58 23 232

Chile 27 11 209

Korea, Rep. of 19 111 389

Portugal 10 44 143

Zimbabwe 10 4 53

Thailand 9 114 125

Mexico 8 159 233

Brazil 7 43 590

Philippines 7 62 138

Venezuela 7 8 110

India 6 19 6,017Greece 5 18 116

Pakistan 5 9 379

Nigeria 4 1 100

Colombia 3 8 96Turkey 3 6 50Argentina 2 16 206

strides in recent years in establishing and invigo-rating equity markets. Such markets now exist inmore than forty countries. Indeed, the market cap-italization of stock exchanges (that is, the totalvalue of listed shares) is a greater proportion ofGNP in Jordan and Malaysia than in France andGermany, and India's stock exchanges list morecompanies than the stock markets of any othercountry except the United States (see Table 7.1). Inmany countries, however, equity markets remainsmall. Only a few countries have active corporatebond markets; they include Canada, India, Korea,and the United States.

The supply of equities has been limited by thereluctance of owners of private companies to dilutetheir ownership and control by issuing stock or tocomply with requirements to disclose informationabout their operations. The availability of less ex-pensive debt finance has also discouraged equityissues. Some countriesfor example, Koreahaveprovided considerable tax incentives to encouragecorporations to go public. In Jordan, any firm seek-ing limited liability must offer a substantial per-centage of its shares to the general public. Chile

Figure 7.2 Stock indexes in selected developingcountries and the United States, 1987 and 1988

Index (December 1986 = 100)800

700

600

500

400

300

200

100

March

December1986

110

0Philippines United States

Note: For the developing countries, the stock index is the IFCindex of total returns in U.S. dollars; for the United States, it isthe Standard and Poor's 500.Source: IFC 1988 and 1989.

requires all limited liability companies of a certainsize to make the same financial disclosures as pub-licly listed firms. In the past, demand for securitieshas been inhibited by the lack of investor confi-dence. In the future, much of the demand is likelyto come from institutional investors.

A primary reason for the underdeveloped stateof capital markets in many developing countries isthe absence of an appropriate legal, regulatory,and tax framework, In some countries new shareshave to be issued at par value, which makes themunattractive to companies if the market value oftheir shares has appreciated significantly. In othercountries the tax-free status of time deposits orgovernment and public enterprise bonds lessensthe appeal of private corporate instruments. Farmore important in developing countries, however,is lax enforcement of corporate income taxes. Thismakes it possible for closely held corporations toavoid taxes by showing very low accountingprofits; publicly traded corporations cannot hidetheir profits without hurting investor confidence.

A common problem in securities markets, espe-cially early in their development, is the danger of aspeculative boom followed by a sharp decline.Such crises have affected markets in Brazil, HongKong, Korea, Mexico, the Philippines, Singapore,and Thailand. Large increases and declines inprices also affect securities markets in high-incomecountries, but they can be much more pronouncedin young markets. The Wall Street collapse of Oc-tober 1987 was far less abrupt than the collapse ofmany smaller markets (see Figure 7.2).

Countries with a relatively large business sectorand middle class should encourage the develop-ment of securities markets. Fiscal policies that dis-criminate against equities should be changed.Governments also need to define the operationalscope of underwriters, brokers, dealers, merchantbanks, and mutual funds and to encourage the es-tablishment of credit rating agencies. Privatizationof state-owned enterprises can be another stimulusto securities markets. Privatization has been one ofthe forces revitalizing Chile's equity market in re-cent years. In France, 167 state enterprises andsubsidiaries were divested from late 1986 throughearly 1988, and their shares were taken up by morethan 13 million individuals. As a result the capitali-zation of the Paris stock market increased by anamount equivalent to 6 percent of GDP.

Encouraging foreign portfolio investment is an-other way to raise demand for securities in devel-oping countries. The increasing role of institu-tional investors means that foreign portfolio

Portugal - Turkey

MarchSeptember

June December1987

June

September

December1988

investment might grow substantially. Prices in sev-eral emerging markets have shown a low or nega-tive correlation with price movements in theUnited States and Japan and thus offer foreign in-vestors an opportunity to reduce risk. During1975-87, equity markets in six developing coun-tries outperformed the market in the UnitedStates, and two of them (Chile and Korea) outper-formed Japan.

In capital-exporting countries, regulations onforeign portfolio investment limit the extent towhich contractual savings institutions can investabroad. In developing countries, concern over vol-atile flows of money and increasing control by for-eigners has prompted a variety of restrictions anddisincentives. Foreign portfolio investment is usu-ally passive, but the concerns of developing coun-tries can in any case be met by such means as theclosed-end country fund, whose shares can betraded but not redeemed. More than thirty devel-oping country funds, most of them closed-end,have been floated in emerging markets since 1980.Since issue, the market value of twenty-five of themhas increased by 86 percent (as of August 1988).

Priorities for reform

Building a financial system more responsive to theneeds of lenders and borrowers will require sub-stantial improvements in the macroeconomic, le-gal, and regulatory environments. Developingcountries also need to broaden the range and im-prove the efficiency of their financial institutionsand markets. Much can be achieved by removingobstacles to the development of different instru-ments, by adopting a system of regulation by func-tion rather than by institution, and by strengthen-ing the management capabilities of individualinstitutions.

To operate efficiently, financial institutions andmarkets have to be guided primarily by marketforces rather than government directives. Compe-tition needs to be strengthened by encouraging theentry of new and innovative providers of finan-cial services, by phasing out interest rate controlsand high levies on financial transactions, and bystimulating the development of money and capitalmarkets.

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Issues in informal finance

Small-scale producers and enterprises have longbeen known to account for a large share of eco-nomic activity in developing countries. Most ofthese enterprises are noncorporate: small farmers,producers, tradespeople, and independent trad-ers. They do not maintain income statements andbalance sheets, are not registered with any govern-ment office, and often are not licensed as busi-nesses. Recent studies that have attempted toquantify their importance conclude that the non-corporate sector accounts for 30-70 percent of thelabor force in some developing countries.

Noncorporate businesses differ greatly in theirdemand for financial services. Street vendors needshort-term finance to buy stock, and they need adepository for temporary surpluses. Small-scaleproducers need somewhat larger and longer-termloans to buy equipment or to hire rionfamily labor.Small farmers need to cope with an uncertain andfluctuating income stream, which they do by accu-mulating liquid assets and sometimes rolling loansover to subsequent cropping seasons. As farmingbecomes more capital-intensive, farmers may alsodemand longer-term credit to buy equipment. Thischapter examines the ability of informal and formalinstitutions to satisfy the financial needs of house-holds, agriculture, and noncorporate enterprises.

Formal financial arrangements are often not wellsuited to the needs of the noncorporate sector. Thesums involved can be too small for a formal institu-

tion because many of the costs of advancing a loanor accepting a deposit are independent of the sizeof the transaction. Often the cost to formal institu-tions of opening branches in villages and smalltowns is not justified by the business that can begenerated. In one African country it was estimatedthat an institution serving a largely noncorporateclientele would require a minimum of 2,500 de-posit accounts to cover the cost of a single em-ployee for a year. Noncorporate borrowers rarelyhave collateral acceptable to banks. Their credit-worthiness resides in their human capital, which isdifficult for formal intermediaries to gauge. Theinterest rates that banks are allowed to pay for de-posits or to charge on loans often fail to reflectthese factors. All this makes supplying financialservices to the informal sector unprofitable for for-mal institutions.

The popular view of informal finance is of pow-erful moneylenders who exploit the poor throughusurious interest and unfair seizure of collateral. Infact, informal finance is both extensive and di-verse. The informal sector accounts for most of thefinancial services provided to the noncorporatesector. In addition to family and friends, who pro-vide a large percentage of the loans, informal fi-nance consists of professional moneylenders,pawnbrokers, tradespeople, and associations ofacquaintances. In separate studies of five Asiancountries, professional moneylenders provided

less than 20 percent of informal rural credit; onaverage they accounted for only 6 percent.

Informal financial arrangements reduce transac-tion costs and risk in ways denied to formal institu-tions. Moneylenders, for example, can operate outof their own homes or on the street, maintain onlythe simplest accounts, and mix finance with otherbusiness. The services they provide are outside thereview and control of the monetary authorities.The remaining costs can be fully reflected in im-plicit or explicit interest rates.

Freedom from regulation allows informal agentsgreater flexibility. But it also denies them many ofthe legal sanctions available to formal intermedi-aries. In place of formal legal mechanisms, infor-mal agents rely on their knowledge of one anotherand on local sanction to reduce the risk of lending.Social standing and the ability to obtain future fi-nancial services are often at stake in the market forinformal financial services. These sanctions are ef-fective. That is why informal financial arrange-ments are so widespread (see Box 8.1).

Informal financial arrangements

Without trying to be exhaustive, this section offersexamples of informal financial arrangements. Theexamples cover three main sorts of transactions:short-term finance for daily stocks or emergencies;finance to smooth a fluctuating income stream;and finance for larger, long-term investments. Thelimitations of informal arrangements are thenexamined.

Short-term credit

Noncorporate enterprises commonly require smallamounts of short-term funds to cover immediateexpenditures, such as a business opportunity, asocial obligation, or an emergency. Such fundingmight come from moneylenders or pawnbrokersbut is more likely to be borrowed from relatives orfriends. The choice of arrangement will depend oncost and convenience.

But informal short-term credit may entail hiddencosts. For instance, lending between friends andrelatives often carries low interest or no explicitinterest charge. In societies with strong traditionsof mutual assistance and reciprocity, individualswho need funds can call on friends and relativesfor help. Acceptance of such help obligates theborrower to reciprocate by providing nonfinancialservices or by supplying funds in turn when thelender needs to borrow. These traditional obliga-tions of mutual support can be a problem for thosewho wish to accumulate capital. The desire to pro-tect personal savings from family and friends cre-ates a strong demand for less accessible savingsinstruments when these become available.

Market vendors and other small businesses oftenturn to moneylenders for their short-term creditneeds. The so-called five-six arrangement underwhich the borrower receives $5 in the morning andrepays $6 to the lender in the evening is common.The interest rate of 20 percent a day seems ex-tremely usurious. But the moneylender does notperform the transaction every day of the year, and

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Box 8.1 Informal finance in Niger

A sample of 398 village households in rural Niger in1986 indicated that informal credit accounted for 84percent of total loans and was equal to 17 percent ofagricultural income. Informal tontines (rotating savingsand credit associations), money guards, and merchantfinance predominate. The first two supply a variety ofservices in the local market, and merchant financebridges formal and informal markets. Large whole-salers borrow from formal banks, purchase a range ofconsumer goods, and then consign these goodsthrough a network of small village retailers. These re-tailers, in turn, may sell the items to villagers on credit.

Out of a sample of fifty-six tontines in twenty-twovillages, some had only four members, others morethan forty. The average member contribution rangedfrom 100 CFA francs (25 cents) to CFAF25,000 ($70).

The total size of all fifty-six tontines, as measured bymember contributions per meeting, was the equivalentof $72,000. This suggests a promising base for depositmobilization in rural Niger.

Many of the money guards are traders who havestorage facilities, offer deposit and pawnbroking ser-vices, and market goods in other regions. Fifty-sixmoney guards were surveyed in 1986 in the twenty-two villages in the tontine sample. Their deposit baseranged from several depositors to as many as 150,and (in the immediate postharvest season) fromCFAFIO,000 ($30) to CFAF5 million ($13,000). They nei-ther paid interest on their deposits nor charged fees forsafekeeping. Money guards also provided loans, theaverage size of which was CFAF55,000 ($144).

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Box 8.2 Rotating savings and credit associations

Rotating savings and credit associations (ROSCAs) area popular form of informal finance. They have variousaliases: tanda in Mexico, pasanaku in Bolivia, sun in theDominican Republic, syndicate in Belize, gumaiyah inEgypt, isusu in Nigeria, susu in Ghana, tontine in Niger(see Box 8.1), hagbad in Somalia, xitique in Mozam-bique, arisan in Indonesia, paluwagan in the Philip-pines, chit fund in India and Sri Lanka, pia huey in Thai-land, hui in China, kye in Korea, and ko in Japan.

ROSCAs intermediate in the most basic way. A smallnumber of individuals, typically six to forty, form agroup and select a leader who periodically collects agiven amount (a share) from each member. The moneycollected (the fund) is then given in rotation to eachmember of the group. In some countries, such as Indiaand Cameroon, ROSCAs have evolved into formalbanks.

Three types of ROSCAs are found in many countries.In common ROSCAs, the leader receives no specialconsideration (other than possibly getting the firstfund). Commission ROSCAs pay their leaders, who inreturn may assume liability for defaults. PromotionalROSCAs are used by merchants to sell goods, espe-cially consumer durables.

Loans are interest free in most common and pro-motional ROSCAs; the amount received is equal tothe total paid in by the member. More sophisticatedROSCAs may allocate funds on the basis of discount

bids, a practice common in China, India, Thailand, andsome parts of West Africa. The winner is the personwilling to accept the largest reduction in share paymentfrom other participants in return for receiving the nextfund. All participants in a commission ROSCA, exceptthe leader, pay for the right to participate and receiveback less than they contribute.

Recent research in Bolivia showed that one-third toone-half of all adults living in urban areas often partici-pated in ROSCAs and that their ROSCA paymentsamounted, on average, to about one-sixth of their sala-ries. These associations were even found among em-ployees of formal financial intermediaries. Despite hy-perinflation and poor loan recovery by formal lenders,Bolivians reported few problems in their ROSCAs.Studies show that a relatively high proportion of thosewith steady incomes in Cameroon, India, and SriLanka often participate in ROSCAs. These associationshave also been reported among employees of the cen-tral banks of Belize, Bolivia, the Dominican Republic,and the Philippines.

The popularity of ROSCAs among low- and middle-income groups shows that people like to save, evenunder trying circumstances. The Bolivian researchshowed that more than 90 percent of the people inter-viewed joined ROSCAs primarily because they wantedto save more and felt that membership forced them todo so.

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jloan losses and transaction costs reduce the real-ized rate of return. To keep collection rates highand transaction costs low and to minimize the costof idle funds, the moneylender maintains relationswith the same borrowers. Conversely, borrowersare paying not only for that day's loan but also forcontinuing access to immediate credit.

Loans from moneylenders are typically short-term and are extended to clients of long standing;they are rarely tied to collateral. Most moneylend-ers use their own funds for lending. Interest ratesare high. Where entry is restricted and alternativefinancial services are lacking, high interest ratesmay be partly a result of imbalances in economicand social power, but the cost and risk of smallloans are also high. To meet the demand for timelyand convenient loans, the moneylender mustmaintain adequate liquidity, some of which will beidle during slack periods. The opportunity cost ofthis reserve is part of the moneylender's costs.Many noncorporate agents with access to formal

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credit may also borrow from moneylenders if for-mal lenders take too long to process an applica-tion. Two to three weeks is quick for many formalintermediaries, and two to three months is not un-common. Often, loans from moneylenders areused to make a transaction at short notice, andfunds from formal lenders are used to repay themoneylenders.

Borrowers who own marketable assets may turnto pawnbrokers for short-term credit. Pawnbro-kers take possession of assets for a fixed term andlend against them at an agreed rate of interest.During the term of the loan the borrower is free torepay and thereby to redeem his asset. Once theterm expires, the pawnbroker can sell the assetand keep the proceeds. Because the loan has collat-eral, the pawnbroker needs no further informationabout risk. But the pawnbroker must know theresale market well if he is to sell such assetsprofitablyespecially since the borrower has theoption of avoiding the pawnbroker altogether by

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selling and then repurchasing the asset on hisown.

Pawnbroking is an example of how collateral isused in some informal arrangements to reduce riskand fill the gaps in information that characterizethe noncorporate sector. Other, slightly more so-phisticated solutions include sale and repurchasearrangements (in which the borrower retains phys-ical possession of the asset while the moneylenderhas legal title) and the use of overdraft checks forloan surety. In these cases commercial law makesrepayment enforceable, and recourse to bankinglaw continues to be avoided.

Seasonal credit and short-term savings

Another common need is to smooth fluctuations inincome. This can be done with liquid savings orseasonal credit. In rural areas marketing interme-diaries are often an important source of credit forfarmers. In urban areas retailers may offer creditfor the goods they sell. Marketing agents oftenprovide lines of credit to farmers in return for acommitment to sell produce through the agents.The farmer may be charged explicit interest, or hemay pay indirectly through the price received forhis crop. The agent knows the farmer, and thisreduces his risk and transaction costs.

It is sometimes difficult for analysts to determinethe implicit interest charges when loans or repay-ments are made in kind. In the Sudan, for exam-ple, a merchant might provide a farmer with twosacks of millet in return for three sacks at harvest-time two months later. The apparent monthly in-terest rate is 25 percent. But the true rate is muchlower because the price of millet is typically higherbetween harvests than at harvesttime.

Philippine corn traders provide credit to manyfarmers. Transaction costs are low for lender andborrower alike, and interest rates range from 2 to 3percent a month. (Interest rates on bank loans tocorn traders are 1.5-2.0 percent a month.) Theterms of the loans are flexiblemost range fromfour to five monthsbut because borrowers arevulnerable to the climate, it is common for tradersto carry loans over to a second or even a thirdharvest. Although the interest costs of trader creditare higher than for loans from formal institutions,transaction costs are lower, and so the total cost ofborrowing is roughly the same. The difference isthat formal, targeted credit is simply not availableto most corn producers when it is needed.

Noncorporate agents can smooth their consump-

tion by saving. Formal intermediaries have beenslow to develop deposit services for this sector, buta variety of informal arrangements allow farmers,small businesses, and households to pooi theirsavings. The simplest such arrangement is the useof money guardslocal people who safeguardcash for those who have no secure means of doingso. Most such deposits earn no interest and aresecured only by the word of the money guard. Theguards maintain enough liquidity to return de-posits at short notice. Some deposits may be usedby the guards for business transactions or for lend-ing, but if so the practice is seldom made public.

Informal deposit services are also provided bygroup savings associations. Deposits can be madeat regular or irregular intervals. Funds are some-times lent temporarily and then returned to thedepositor at the end of an agreed period, or theycan be applied to the cost of providing a publicgood. A popular arrangement is the rotating sav-ings and credit association (ROSCA), which is de-scribed in detail in Box 8.2. Members pool moneyby making periodic payments into a fund, whichthen rotates among members as a lump-sum pay-out. This allows at least some members to financelarge expenditures sooner than if they had reliedon their own savings. Some ROSCAs even meetthe demand for the larger and longer-term loansthat are needed to finance the cost of housing.

The popularity of such arrangements shows thepotential for pooling individual savings amongsmall farmers or microentrepreneurs. In Englandand elsewhere building societieswhich later be-came an important part of the formal financialsystemoften began as ROSCAs.

Long-term finance

Because informal lenders and their customers aresmall and isolated, the risks of long-term lendingare greater. Not much term finance is provided bythe informal sector, but some informal arrange-ments have developed, mainly for housing fi-nance. One example is key money, as in Boliviaand Korea. A home buyer can lease his house inexchange for a large cash payment. After anagreed period the house and the money are reex-changed. The interest that could have been earnedon the money is the rental value of the house. Therecipient of key money may use it to finance a busi-ness venture or the purchase of the house, thuscircumventing the lack of conventional mortgagefinance. He must then save enough to return the

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original amount to the renter by the end of therental period.

Limitations of informal financial arrangements

Despite their success in providing financial ser-vices to small businesses that would otherwise lackthem, informal financial arrangements do not meetall the needs of the sector. For example, such ar-rangements do not allow savings to be collectedfrom more than a small group of individuals wellknown to one another, and they do not movefunds over large distances. Especially in rural areaslocal markets may be segmented from nationalmarkets, which limits the supply of credit. Mostloans are from family and friends or group associa-tions and are at low interest rates. The higher ratesthat moneylenders and pawnbrokers charge are inlarge part due to the higher costs and risks associ-ated with informal loans. But some loans frommoneylenders are at very high interest rates be-cause of the power imbalance that exists betweenborrower and lender. In fact, much of the tradi-tional criticism of moneylenders has derived fromthe high interest charges and intimidating prac-tices of loan sharkslenders who often finance ille-gal activities. Except in housing finance, informalarrangements generally do not provide term fi-nance. These shortcomings may inhibit the long-term planning and investment that are necessary ifproductivity is to rise.

The limitations of informal financial arrange-ments do not call for completely new institutions.Indeed, formal intermediaries have often failedwhere informal arrangements have prospered.Formal institutions, and the policymakers who settheir rules, might learn much about these marketsby studying informal arrangements more closely.Their essential features are these. Transactions areundertaken by mutual consent, so the arrange-ments must meet the needs of both the buyer andthe seller of the service. Transaction costs are keptto a minimum. And lenders are able to reduce therisk of default by using knowledge that they havealready gathered from other social or businessdealings. Sometimes informal arrangements pro-vide a basis for establishing links with formal insti-tutions so as to provide a fuller range of services.

Semiformal finance

Several approaches have been tried to overcomethe limitations of informal finance for the noncor-porate sector. As discussed in Chapter 4, many

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government programs of directed, low-cost lend-ing have experienced serious difficulties. Twotypes of lending arrangements, which fall in thegray area between informal and formal finance, of-fer some promise. These are group lendingschemes and cooperative financial institutions,which can be found the world over.

Group lending schemes

The funds for group lending schemes can comefrom a commercial bank, a government develop-ment bank, or private institutions. The role of thegroup varies. In some cases the funds are lent tothe group as a whole, which then allocates themamong members. Or loans maybe made directly toindividual members of the group. In either casethe group provides a guarantee; it is answerable tothe outside lender for the repayment of loans.

The idea is that by joining together, small bor-rowers can reduce the costs of borrowing and im-prove their access to credit. The outside lender'scosts are reduced because lending to a grouplowers the risk of dealing with small businessesand circumvents the problems involved in select-ing borrowers. The groups themselves must be se-lective in accepting new members. In this way,groups act as a substitute for information aboutborrowers and thereby reduce the costs of process-ing loans. Group members encourage each otherto repay on time so that the rest can qualify forloans in the future. This directly reduces thelender's commercial risks.

The two most common means of providinggroup accountability are (a) joint and several liabil-ity and (b) limited liability. Joint and several lia-bility encourages extremely careful selection ofmembers because any member can be held liablefor the defaults of others. It may, however, deterthe comparatively wealthy from joining the group,since they have more to lose. In rural Zimbabwe,schemes based on joint and several liabilityworked well in times of average production butfared worse than other schemes in the same area intimes of drought and low production. The threat ofdefault led farmers to withhold repayment andhope for a general amnesty, since they would be,in any event, accountable for other members'debts.

Group lending schemes based on limited liabilityare more common. In Malawi and Nepal borrow-ers are required to put part of their loans in a fundthat would be forfeited if any member defaulted. Ifall members repay their loans, these deposits are

While the government struggled to create a viable ruralbanking system in Bangladesh, a small private initia-tive was started in 1976 to help the landless withoutnormal bank collateral to obtain credit. This programhas become the Grameen (Rural) Bank. The uniqueoperating procedures of the Grameen Bank grew out ofseveral earlier attempts to reach the rural poor andwere a sharp departure from traditional banking. Thebank's customers, who are restricted to the very poor,are organized into five-person groups, and each groupmember must establish a regular pattern of weekly sav-ing before seeking a loan. The first two borrowers in agroup must make several regular weekly payments ontheir loans before other group members can borrow.Most loans are to finance trading and the purchase oflivestock.

By February 1987 the Grameen Bank was operating300 branches covering 5,400 villages. Nearly 250,000persons were participating, among them an increasingnumber of women, who accounted for about 75 per-cent of the total. The membership included about 13percent of households with less than half an acre ofland in the areas in which the bank was operating.Loans are smallon average, about 3,000 taka ($100) in1985. By the end of 1986 about Tkl.5 billion had been

Box 8.3 The Grameen Bank: an alternative approach to noncorporate financein Bangladesh

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returned. This practice has resulted in a goodrecord of repayment. In Malawi, where 10 percentof loans was held as security, 97 percent of sea-sonal credit disbursed between 1969 and 1985 wasrecovered. In Nepal's Small Farmer DevelopmentProgram, which required security deposits of 5percent, the repayment rate in 1984 was 88 per-cent. These repayment rates compare favorablywith other small-borrower credit programs. An-other way of imposing limited liability is to linkcontinued access to credit with prompt repaymentof existing loans (as is done in Ghana, Malawi, andZimbabwe).

Group lending schemes have improved access tocredit in many countries, but they too have draw-backs. Groups have often been created at the ini-tiative of governments or private developmentagencies. This top-down approach means that ascheme can be extended rapidly, but it may under-cut the force of local sanction. In one Latin Ameri-can scheme, bank employees formed groups fromlines of borrowers at their windows. Such arbitraryselection is unlikely to achieve group accountabil-ity. A second shortcoming is that the schemes rely

on external funds. Few collect deposits, partly be-cause the supply of cheap external funds reducesthe intermediary's incentive to provide this ser-vice, but also because deposit taking is viewed astoo complex a task for unpaid group leaders. De-spite these drawbacks, some group lenders, suchas the Grameen Bank of Bangladesh, have an im-pressive record (see Box 8.3).

Cooperative finance

In group lending, borrowers and intermediariesare separate entities. In a cooperative arrange-ment, borrowers and depositors own the interme-diary. In some countries such cooperatives fall out-side the regulations that govern banks and similarinstitutions. This can give financial cooperativesflexibility, but it can also cut them off from therediscounting and other facilities that are generallyavailable to other institutions.

In many developing countries cooperatives oper-ate under a government department that supportsthem with funds, technical assistance, and policyguidance. Government support is attractive to the

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disbursed, of which almost Tkl.2 billion had been re-covered. Outstanding loans were thus about Tk300million, with almost 70 percent held by women bor-rowers.

In sharp contrast to the Bangladesh commercialbanking system, the Grameen Bank has experiencedexcellent loan recovery. As of February 1987 about 97percent of loans had been recovered within one yearafter disbursement and almost 99 percent within twoyears. This good performance is reportedly attributableto a combination of factors: close supervision of fieldoperations, dedicated service by bank staff, borrowingfor purposes that generate regular income, solidaritywithin groups, and repayment in weekly installments.Another factor which encourages repayment is the bor-rower's knowledge that the availability of future loansdepends on the repayment of borrowed funds.

Bank staff meet weekly with groups to disburseloans, collect savings deposits and loan payments, andprovide training in financial responsibility. This meanshigh operating costs. The ratio of expenses to loansrose from 9 percent in 1984 to 18 percent in 1986. Thesehigh costs have been partially offset by low-cost fundsfrom international agencies.

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cooperatives' managers because it allows lendingto expand quickly, but it weakens the incentive ofcooperative members to provide their own fi-nance. When loans are made according to govern-ment directive, lenders may find it difficult to col-lect. Such loans are often seen as grants and henceas resources that can be spent on consumption.Often, cooperatives have been promoted as acounter to usurious moneylenders and marketingagents. This has sometimes led the advocates ofcooperatives and credit unions to think that finan-cial services can be supplied to small producers forless than the real cost.

Moreover, the goals of government and coopera-tives can differ greatly: governments often viewcooperatives as instruments for the conduct ofbroader policy. In Africa, for example, a ministrywished to use the cooperative credit system tochannel low-interest funds from foreign donors totargeted programs. When the ministry's plan waspresented to the cooperative, the director declinedbecause he felt that the funds would never be re-couped by his institution. The director was told toreconsider or resign. The plan went into effect, re-payment rates were extremely low, and other co-operative lending programs were undermined.The cooperative managed to refuse liability fornonrepayment, but the defaults affected repay-ments of the institution's other loans.

Similarly, the support of foreign donors can be amixed blessing. Cooperatives may seem a suitablechannel for development funds, but they oftenend up with heavy liabilities and a bad collectionrecord. This mirrors the experience of develop-ment banks discussed in Chapter 4. Cooperativesthat lend internally generated funds with an eyeon the rate of return do better than those that aretold what to do by outsiders. Even those loans thatinvolve no liability for the cooperative incur staffcosts which may overburden a small institution.

Despite the difficulties, cooperatives are a goodway of increasing access to financial services. Theircosts are often low because they use volunteer la-bor and because they can reduce risk throughgroup accountability and local sanction. Wheregovernments have been more concerned with theviability of cooperatives than with social objec-tivesand where interest rate restrictions havebeen relatively modestcooperatives have flour-ished and the supply of financial services hasbroadened. In Togo, for example, savings in thecredit union system grew by 25 percent a year andloans by 33 percent a year during 1977-86. Mem-bers elect a board of directors, which decides on

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interest rates, dividends on shares, and lendingpolicies. The credit unions are federated, and theyjointly manage a central fund, invest in low-riskfinancial instruments, and mediate transfers be-tween member unions with surplus funds andthose with deficits. Loans from the central fund tounions lacking liquidity amounted to only 13 per-cent of its assets; deposits with financial institu-tions accounted for 81 percent. Togo's creditunions, like informal suppliers of financial ser-vices, live or die in the marketplace. But unlikeinformal intermediaries, they have access tobroader financial markets through their federatedstructure. As a result, they can intermediate be-tween regions and diversify their assets.

Improving finance for the noncorporate sector

Although informal financial arrangements doserve the needs of the noncorporate sector, theycannot be regarded as adequate. Many of the at-tempts by governments and international donorsto increase the supply of finance to the noncor-porate sector have focused on providing access toaffordable credit. They have foundered becausethey did not take into account the true costs andrisks of lending to the sector. Lowering the costsand risks would help to put the sector within reachof formal institutions. Greater competition be-tween formal and informal lenders would improvethe allocation of resources.

Improving the legal environment

Legal reforms could make it easier for small enter-prises with relatively large financial needs to useformal services. Such reforms include better defini-tion and enforcement of property rights. Squattersand small farmers with clear land titles would thenhave an acceptable form of collateral. Propertylaws that limit inheritance by women or prohibitmarried women from holding property in theirown names limit their access to credit. In manycountries banking laws require women to obtainpermission from their husbands or fathers to bor-row. In much of Africa such laws reduce agricul-tural investment by placing an economically irrele-vant barrier between the farmer and her source offinance.

Laws meant to protect borrowers have oftenmade loan contracts harder to enforce and havethereby raised the risk of lending. Licensing andregistration formalities and taxation of businessesneed to be kept in check. Small businesses in Peru,

Improvements in the provision of financial ser-vices might be gained by upgrading informalarrangements and linking them to formal insti-tutions. This implies building upon, not sup-planting, the existing arrangements. The linking ofinformal arrangements with cooperatives is be-coming increasingly common in Africa. In Kinkala,a small rural town in the People's Republic of theCongo, a savings and credit cooperative, Coopéra-tive d'Epargne et de Credit (COOPEC), has 268members. Informal arrangements operate in thelocal market. Among them is a ROSCA withtwenty-four members. Each member contributes2,000 CFA francs a month (about $4.50 in 1985) andreceives the total collection of CFAF48,000 everytwo years. This scheme has been linked withCOOPEC so that ROSCA members (who are alsoenrolled in the cooperative) make their monthlycontribution to the COOPEC manager, who de-posits the total CFAF48,000 in a savings account.ROSCA members are considered a good risk; theirloan applications are looked upon favorably by theCOOPEC loan committee. In this way, COOPEChas mobilized funds from its members and has sat-isfied credit demand.

An example of an apparently successful conver-sion of borrowing groups into a cooperative bankis the Working Women's Forum of Madras. In 1978thirty women engaged in petty trade organized asa group to borrow from a commercial bank. De-spite the success of this and other affiliated groupsof Indian women, dissatisfaction with delays andinflexible disbursement and repayment schedulesled them to form and staff their own bank in 1981.

An example of upgrading that produced mixedresults is the conversion of indigenous savings andcredit associations (isusu) into cooperatives in east-ern Nigeria. Cooperatives based on isusu per-formed better in most respects than the rest. Mem-bers of these cooperatives, however, not onlyremained members of indigenous savings andcredit associations but also held most of their sav-ings there. This was partly because the govern-ment gave the cooperatives easy access to funds,

Governments in many developing countries haveencouraged formal institutions to serve the non-corporate sector. The means have included low-cost rediscount facilities for targeted lendingthrough commercial banks, mandatory lendingtargets, and state-supported lending institutions.As Chapter 4 pointed out, these policies have cre-ated weak institutions and have thereby retardedthe development of an efficient financial sector.They have been particularly damaging to the farmsector. These failures have come to be widely iec-ognized, and a search for better solutions is underway.

Government-supported credit programs for thenoncorporate sector can work. This is shown bythe Badan Kredit Kecamatan (BKK) program in In-donesia (see Box 8.4). The program provides loansto rural enterprises and other small borrowers. Itsviability has been maintained through interestrates that reflect lending costs and through the useof local sanction to enforce repayment. Sharedprofits encourage careful lending by BKK staff.Funds for the program have come from a govern-ment-mandated rediscounting facility, but thescheme was designed to maintain its indepen-dence.

Most of the successful formal institutions thatserve the noncorporate sector, however, take de-posits. Some institutions have greatly improvedtheir position by doing so. The Banco Agricola inthe Dominican Republic began to offer passbooksavings services in 1984 because it was in seriousfinancial difficulty and urgently needed funds. By1987 deposits had increased more than twentyfold.Although 60 percent of the depositors were pre-vious borrowers from the institution, the rest werea new clientele who demanded only a safe andconvenient store for liquidity.

Mobilization of voluntary deposits is desirablefor several reasons. First, resource allocation canbe improved if noncorporate agents have good de-posit opportunities with positive real rates of inter-est and low transaction costs. Second, the flow of

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for example, are forced to operate clandestinely which reduced their incentive to collect depositsbecause legal status costs too much. So regulation and undercut their independence. Many coopera-fails even in its narrow objective. Meanwhile, the tive members, seeing that this new source of fi-economic welfare of suppliers and customers is re- nance was risky, continued to rely on the informalduced because businesses would have better ac- arrangements. If the advantages of formality arecess to formal credit if they were properly regis- visible and worthwhile, clients will participate andtered and licensed. the institution will prosper. If not, they will return

to the informal arrangements.Links between informal and formal finance

Formal intermediation for the noncorporate sector

I

through the organization of retired military officerscost 47.5 percent a month. The BKK's effectivemonthly rate is about 7.5 percent. A maximum of oneweek elapses between loan application and disburse-ment or rejection. If the first loan is repaid on time,new loans may be disbursed on the same day as theapplication. To get a loan, borrowers must fill out asimple one-page form and receive the approval of theirvillage leader. No collateral is required. The system re-lies upon character references from local officials andpeer pressure to encourage repayment.

The BKK reduces risk by making initial, short-termloans of about $5. The administrative costs would seemprohibitive. But these loans introduce villagers to thefinancial system and enable them to graduate to largerloans. Most clients agreed that the greatest incentivefor repaying on time was the expectation of gettinganother loan.

Each local BKK is an independent unit, not a bankbranch. The staff of the regional development banksupervises the local units carefully. Salaries of BKKstaff are low, but motivation to expand the portfolioand maintain a good collection rate is high, since 10percent of a BKK's profits are divided among its staff. Ifa BKK goes bankrupt, staff members are no longerpaid.

The main source of BKK funds has been loans fromthe regional development bank. Each loan to borrow-ers, however, has a mandatory savings component thatearns interest and can be withdrawn when the loan isfully repaid. Recently the BKK began a voluntary sav-ings program in nine units. More than $30,000 wasraised within seven months, with an average savingsaccount of only $9. Most of these voluntary savers werenot BKK borrowers. The program will be duplicated at400 of the healthiest units in 1988-89.

I

resources is typically from small savers to high-yield activities in the corporate sector. Inadequatedeposit facilities can block the most importantchannel for this flow. Third, financial institutionsrequire the independence and discipline that onlyvoluntary deposits can provide. Institutions gainfrom extra information on potential borrowers,from the relationships that bind intermediary andclient, and from the borrowers' knowledge thatloans come from neighbors and not distant gov-ernment or international agencies.

A strengthening of formal financial institutions(as discussed in Chapter 7) will be needed if they

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are to provide sustainable financial services to thenoncorporate sector. This means better manage-ment and improved incentives for employees. In-novation will be needed to contain the added risksof providing finance to the noncorporate sector.Group lending is one example. Another is the ratch-etmg of loansmaking small loans initially and big-ger ones after the borrower has proved creditworthy.This has been the practice of many group schemesand of both the Grameen Bank and the BKK.

Formal institutions could extend more of theirservices to the noncorporate sector if it was profit-able to do so. This means improving the ability of

Box 8.4 The Badan Kredit Kecamatan: financial innovationfor the noncorporate sector in Indonesia

A government project in central Java, the Badan KreditKecamatan (BKK), lends tiny sums without collateral,largely to middle-aged peasant women. The BKK takesno longer than a week to process the one-page loanapplication form and does not supervise the loans.

It sounds like a recipe for disaster, yet the BKK is oneof the most successful banking operations of its kind inthe world. More than 35 percent of central Java's 8,500villages are serviced by almost 500 subdistrict BKKunits and 3,000 village posts. As of December 31, 1987,the BKK had 516,000 outstanding loans, 90 percent ofwhich were for less than $60. The BKK earned $1.4million in profits in 1987a 14 percent return on theconsolidated average outstanding portfolio for thatyear. Although the delinquency rate appears to behighabout 20 percent of outstanding loansa closerlook reveals that about three-quarters of arrears areseveral years old and should be written off. If theseloans were subtracted, the actual repayment ratewould be around 95 percent. (The BKK resists writingoff bad debts because it feels that this sends the wrongmessage to borrowers.)

Starting in 1970, at the initiative of the governor ofcentral Java, a BKK unit was created in each of thesubdistricts (kecamatan) with an initial loan of 1 millionrupiah. The loan was provided by the provincial gov-

L

ernment through the regional development bank at1 percent interest per month. Additional funds are bor-rowed from the regional development bank, also at1 percent interest per month. To bypass restrictionsand paperwork, these BKK units were classified asnonbanks. This enabled the BKK to charge interestrates high enough to cover its costs, to avoid creditallocation, and to ignore traditional collateral require-ments.

BKK loans are relatively cheap. Daily credit frommoneylenders costs 20 percent a day. Monthly loans

banks to reduce loan losses and establishing clearproperty rights for borrowers. Above all, profit-ability requires reducing directed credit programswith interest rate restrictions, since these fail toreflect the costs and risks involved in lending tothe noncorporate sector.

Most of the financial needs of the noncorporatesector are met quite well by a wide variety of infor-mal arrangements. Providers of informal servicesrely on their knowledge of their customers and onlocal sanction to contain credit risk. But some in-formal financial arrangements are costly, and theyoffer limited alternatives in instruments andsuppliers.

Governments, in their efforts to overcome theseshortcomings, have underestimated the difficultiesof supplying services to the sector. Governmentprograms have benefited the few people fortunateenough to receive cheap credit, but in general theyhave failed to reduce costs or to facilitate the trans-fer of resources from those with surplus funds tothose who can make use of them or to promoteviable financial institutions. Financial services torural areas and to the urban poor would benefitfrom better legal systems, more clearly definedproperty rights, and better links between informaland formal financial institutions.

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A number of countries, both developed and devel-oping, have taken steps to liberalize their financialsystems during the past decade. Interest rateshave been liberalized in Argentina, Australia,Chile, France, Ghana, Indonesia, Japan, the Re-public of Korea, Malaysia, New Zealand, Nigeria,the Philippines, Sri Lanka, Turkey, the UnitedStates, and Uruguay. In other countries, such asThailand and Yugoslavia, interest ceilings havebeen managed more flexibly than before. Severalcountries, such as Chile and Korea, privatizedtheir commercial banks. Argentina, Chile, Paki-stan, and Turkey reduced their directed credit pro-grams, and interest rate subsidies were reduced orabolished in Korea and the Philippines.

Several factors prompted these shifts in policy.During the past decade many developing coun-tries began to place greater emphasis on the pri-vate sector and on market-determined pricing. Inhigher-income countries, the inflationary shocks ofthe 1970s and early 1980s underscored the limita-tions of regulations on interest rates and credit.Rapid advances in telecommunications and infor-mation processing have spurred the developmentof new financial instruments and have promotedgreater financial integration both domestically andinternationally. This has made it harder for govern-ments to control financial markets.

The lessons of reform are obscured by difficultiesin interpretation. The starting point and the pace

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Toward more liberaland open financial systems

and breadth of financial reform varied amongcountries, and it is difficult to disentangle the ef-fects of financial reform from those of other re-forms that were taking place at the same time.Overall, though, it seems clear that financial liber-alization has helped to mobilize resources throughthe formal financial system and to improve the effi-ciency with which they are used.

The task of reform is not straightforward. Thischapter discusses the pitfalls to be avoided in thetransition from a regulated financial sector to onethat is more market-oriented. It also discusses theissues raised by the integration of a country's fi-nancial system with international financial mar-kets.

Recent experiences with financial reform

The pace and scope of reform have differed sub-stantially from country to country. Financial sec-tors in most of the high-income countries were al-ready mature and market-based, and reformfocused on eliminating controls and thereby pro-moting competition. In some developing coun-tries, however, financial systems were heavily re-pressed before reform. Three countries in LatinAmericaArgentina, Chile, and Uruguayshiftedwithin a few years from highly controlled tolargely uncontrolled finance. The Philippines andTurkey also eliminated most of their interest rate

controls within a very short period, but they didnot undertake major financial reforms in other ar-eas. Elsewhere, reforms were even more limitedand were introduced more gradually. Some devel-oping countriesMalaysia, for instancealreadyhad market-oriented systems, but in others, suchas China, the overall economy remained con-trolled. The process of reform was frequently inter-rupted when political resistance or deterioratingeconomic conditions forced governments to slowor even to reverse liberalization.

With few exceptions developing countries intro-duced financial reforms in periods of economicstress as part of stabilization and structural adjust-ment programs. But the degree of stress also var-ied among countries. For example, Argentina,Chile, Turkey, and Uruguay had large fiscal deficitsand suffered from inflation of between 50 and 200percent in the five years before financial reform. Incontrast, Indonesia, Korea, Malaysia, and NewZealand had relatively low levels of inflation bothbefore and after financial reform. Although thesecountries were also attempting to stabilize theireconomies and restructure their trade and indus-trial sectors, their reforms were quite different be-cause they were conducted against a more stablebackground.

Southern Cone countries

Three of the most dramatic and far-reaching pro-grams of financial reform were carried out by Ar-gentina, Chile, and Uruguay in the mid-1970s. Themeasures included the lifting of controls on inter-est rates and capital movements (local banks wereallowed to offer dollar-denominated loans and de-posits), the elimination of directed credit pro-grams, the privatization of nationalized banks, andthe lowering of barriers to entry for both domesticand foreign banks. These reforms were imple-mented relatively quickly, during periods of highand volatile inflation, and as part of broader pro-grams of stabilization and liberalization. Each pro-gram encountered serious difficulties, partly be-cause of the way in which financial deregulationwas handled and partly because of problems in thereal sector.

Following the reforms in Chile, inflation de-clined from 600 percent in 1974 to 20 percent in1981. In the face of decelerating inflation, the realinterest rate rose to extremely high levels: lendingrates were more than 30 percent in real terms inthe years between 1975 and 1982. In Argentina andUruguay, in contrast, inflation remained high and

volatile. As it surged from time to time, real inter-est rates fell, but even so they were often very highin both countries.

All three governments tried to change deep-seated inflationary expectations by publishing aschedule of preannounced changes in the ex-change rate. These schedules (tablita) allowed for aslowing rate of devaluation and were intended toconvince the public that the domestic rate of infla-tion would gradually converge with the interna-tional rate. Similarly, the countries liberalized theircapital accounts to bring domestic and foreign in-terest rates into line. It was hoped that these mea-sures would hasten the return to low inflation andat the same time bring down the countries' highdomestic interest rates. Inflation, however, stayedhigher than the rate implied by the tablita, and as aresult the real exchange rate appreciated consider-ably and exports and output suffered. The widedifferentials between high domestic and lower for-eign interest rates, together with preannouncedchanges in exchange rates, promised very high re-turns and attracted large inflows of capital. Thesein turn caused rapid monetary expansion andmade it difficult to control domestic demand. Thelack of effective regulation and supervision al-lowed speculation and reckless lending to go un-checked.

To restore external balance in the early 1980s, allthree countries had to devalue their currenciessubstantially. These and other measures were nec-essary, but, together with persistently high inter-est rates, they added to the financial distress of thecorporate sector, and many financial institutionsfailed. By one estimate, the nonperforming assetsof Chile's banks amounted to 79 percent of capitaland reserves in 1982 and to more than 150 percentin 1983. The monetary authorities in all three coun-tries were forced to rescue failing banks. Monetaryexpansion, partly caused by these efforts to assistthe banks, undermined the governments' broaderadjustment programs and jeopardized financialliberalization. Argentina and Chile were bothforced to reintroduce direct controls on their finan-cial sectors. But after nationalizing its failed banks,Chile resumed its liberal policies. It began a long-term program to rehabilitate and reprivatize thebanks and to put in place a sound system of pru-dential regulation and supervision. Argentina,too, has been gradually liberalizing since it reim-posed direct controls.

The financial crises in the Southern Cone coun-tries were caused by macro- and microeconomicproblems at home and shocks from abroad. Within

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a brief period firms faced rapid changes in relativeprices, a fall in domestic sales, sharp increases ininterest rates, a major devaluation of the currency,and a sudden termination of external credit. Thebiggest problems began in the real sectors of theeconomy, but efforts to liberalize the financial sec-tor undoubtedly contributed to the resulting insta-bility.

The Philippines and Turkey

The Philippines and Turkey have also reformedtheir financial systems, which were once heavilyrepressed. Their reforms, however, centered onfreeing interest rates. In the early 1980s the Philip-pines liberalized interest rates and allowed com-mercial banks to provide a much broader range offinancial services. In the first years after the re-forms, interest rates rose to about 10 percent in realterms, and the financial sector grew rapidly. Butwhen the country suffered serious macroeconomicinstability during 1983-85, a widespread financialcrisis developed.

Beginning in the late 1970s the Philippines pur-sued expansionary policies to sustain high eco-nomic growth despite a world recession. The fiscaldeficit increased from 0.2 percent of GNP in 1978to 4 percent in 1982, and the current account deficitrose from 5 percent of GNP to 8 percent over thesame period. Political uncertainty reinforced agradual loss of confidence in the domestic econ-omy; capital began to flow abroad just as the sup-ply of foreign finance began to dry up. A smallerexternal deficit in later years was made possibleonly by sharp cuts in imports and domestic ab-sorption. The peso devaluation of 1983-84 and thelarge fiscal deficit caused inflation to rise to 50 per-cent in 1984. In that year the government imple-mented a stringent stabilization program that in-cluded the sale of new high-yield instruments bythe central bank, with the aim of slowing monetarygrowth. To keep their deposit base in the face ofthis new competition, banks and financial compa-nies also increased their interest rates, which attimes rose to more than 20 percent in real terms.The highly leveraged corporate sector thus facedmounting financial strain.

Financial distress in the corporate sector, badmanagement in the banks, political corruption,and inadequate regulation and supervision all ledto a rapid deterioration in the balance sheets offinancial institutions. Eventually the crisis forcedthe government to intervene. A number of smallerbanks were taken into the public sector, and thetwo largest banks, both government-owned, were124

radically reorganized. Between 1980 and 1986 thebanking system's assets shrank 44 percent in realterms.

Until 1980 the Turkish government maintainedstrict control of nominal interest rates. Inflationwas high, and real interest rates were negative. In1980 the government removed the controls and al-lowed banks to issue negotiable certificates of de-posit (CDs). At the same time it embarked upon astabilization and structural adjustment program.The financial reforms were short-lived, however.Two years later, after financial difficulties, the cen-tral bank reimposed ceilings on deposit interestrates.

Turkey's liberalization program differs from theothers in several respects. The government's bud-get deficit declined between 1980 and 1982, whichtook some pressure off the financial markets. Thegovernment did not liberalize capital flows be-tween 1980 and 1982 and thus avoided some of thecomplications that plagued the Southern Conecountries. The annual inflation rate, as measuredby changes in the wholesale price index, declinedfrom more than 100 percent in 1980 to 25 percent in1982. Real interest rates increased sharply duringthe stabilization period. The domestic currency de-preciated in real terms, GNP growth became posi-tive after two years of contraction, and the compo-sition of demand shifted from domestic absorptiontoward exports. Turkey appeared to be on the rightpath.

These macroeconomic changes, however, hitcorporate profits and left businesses struggling toadjust. Financial problems in the corporate sectorthen caused distress in the banking system. Non-performing loans, especially among smaller banks,prompted intense competition for financial re-sources. Banks that needed liquidity increasedtheir deposit rates. Bigger banks tried to limit thiscompetition with a gentlemen's agreement on in-terest rates, but they failed and the competitioncontinued. Banks also issued large volumes of CDsthrough brokerage houses (which offered higherinterest rates), even though this practice was pro-hibited after 1981. Additional financial resourceswere used to meet immediate obligations and torefinance nonperforming loans: in other words,many insolvent borrowers continued to borrow.Indicators of financial depth improved during thisperiod, but a large part of the additional intermedi-ation went to finance interest payments on non-performing loans.

The government finally intervened in mid-1982.It found that some banks had failed to meet theirreserve requirements because of liquidity prob-

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Box 9.1 Financial liberalization in New Zealand

New Zealand is an example of a developed countrythat has made the transition from a heavily regulatedfinancial system to one more reliant on market forces.By 1984 government intervention in finance had be-come widespread. Most intermediaries were subject tointerest rate controls, credit was directed toward pre-ferred sectors such as housing and farming, and inter-mediaries were obliged to buy government securities atbelow-market interest rates. Although these policiesstimulated investment in housing and agriculture andprovided the government with a cheap source of deficitfinancing, they contributed to slow growth by reducingthe credit available for other, potentially more profit-able activities. They also undermined financial stabilityand the effectiveness of monetary policy as financialintermediation shifted to firms less amenable to regula-tion and to institutions less constrained by prudentialstandards.

Following the 1984 election the government intro-duced a new market-oriented strategy. The compre-hensive package of structural reforms sought to spurgrowth and to redress external imbalance by increasingthe role of market forces in the economy. Includedwere trade liberalization, labor market reforms, mea-sures to restore fiscal discipline, and reform of state-owned enterprises (including privatization). In the fi-nancial sector the government abolished all interestrate controls and credit directives, floated the exchange

rate, introduced market-based tenders for sales of gov-ernment securities, and established a new system ofmonetary control. To promote competition among fi-nancial institutions, the government encouraged theentry of new banks irrespective of domicile and ex-tended the right to deal in foreign exchange to institu-tions outside the banking sector. External capital con-trols were removed to deepen the foreign exchangemarket. Liberalization was accompanied by strength-ened supervisory capabilities. Prudential regulationemphasized the prevention of system-wide failurerather than failures of individual institutions, and thegovernment chose not to introduce a deposit insurancescheme.

It is too early to make definitive judgments on thesuccess of the financial reforms, but the evidence thusfar is reassuring. The removal of capital controls didnot lead to capital flightan outcome attributed to thecredibility and the comprehensive nature of NewZealand's program of reform. The number of banksoperating in New Zealand has risen from four to fif-teen. Financial activity appears to have gravitated backtoward the banking sector, and the narrowing of somebanking margins, especially on foreign exchange trans-actions and consumer loans, indicates that competitionhas increased. New Zealand's apparent success sug-gests the importance of incorporating financial reformsinto a broader program of structural reform.

lems. The government merged five insolventbanks with bigger ones, imposed ceilings on de-posit interest rates, and increased its monitoring.In the meantime several brokerage houses, includ-ing some of the largest, went bankrupt.

While Turkey reregulated interest rates, thePhilippinesafter substantially restructuring its fi-nancial intermediariescontinued its liberal pol-icy. The financial problems of both countries re-flected past economic policies and bad bankmanagement. External shocks, structural adjust-ment, and abnormally high interest rates turnedthese problems into a financial crisis. The liberali-zation of interest rates left the corporate sector vul-nerable to macroeconomic shocks. In both coun-tries weak prudential regulation and supervisionallowed the capitalization of interest and a rapiddeterioration of bank portfolios.

Reforms in other countries

Australia, Japan, Malaysia, New Zealand (see Box9.1), and the United States have all liberalized theirinterest rates during the past decade. Restrictions

on the services that could be offered by differentinstitutions were also reduced or eliminated. Fi-nancial systems in these countries were alreadymarket-oriented, and the reforms were designedto stimulate further competition and efficiency.With modestly rising inflation in the 1970s andearly 1980s, interest rate controls on deposits pre-vented institutions from competing effectivelywith unregulated suppliers in the securities mar-kets and Euromarkets. Although the reforms gen-erally improved the efficiency of financial systems,they caused stress for certain institutions such asthe savings and loan system in the United Statesand finance companies in Malaysia. Interest ratesin general were affected more by macroeconomicdevelopments than by the financial reforms. Bankdeposit and loan rates rose modestly in real terms.Financial depth increased substantially. Interestrate spreads and the dispersion of rates in differentmarket segments narrowedall signs of greatercompetition and efficiency.

Other countries that had more repressed sys-tems have also undertaken financial reforms. Thescope and pace of reforms, however, have been

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Box 9.2 Financial reform in Korea

Korea's heavily regulated financial system was a keyinstrument in the government's industrial policy of the1960s and 1970s Interest rates were controlled andwere kept low during most of this period. A substantialproportion of bank creditwell above one-thirdwasdirected by the government to designated sectors. Bythe late 1970s, however, a growing consensus hademerged that this approach was retarding the growthof the financial sector and preventing the efficient allo-cation of resources. Confronted with a significant mac-roeconomic imbalance and slower economic growth,the government changed directions.

Stabilization, structural adjustment, and financial re-foim programs were all introduced in the early 1980s.The government adopted several measures to encour-age competition in the financial market. Nonbank insti-tutions, which were relatively new and lightly regu-lated, were further deregulated, and barriers to entrywere greatly relaxed. Additional foreign financial insti-tutions, including banks and life insurance companies,were allowed to open branches. Commercial banks,most of which had been owned by the government,were privatized. The government eliminated its prefer-ential lending rates and did not introduce any newdirected credit programs. At the same time, the author-ities fostered greater competition among different sortsof financial institutions by allowing them to offer awider range of services.

The loans of commercial banks, even after privatiza-tion, continued to be closely monitored and super-vised. The authorities continued to regulate the inter-est rates of banks and nonbank institutions, but theypartially deiegulated interest rates in the money andsecurities markets. Controls on capital flows weremaintained. When inflation started to decline, real in-

terest rates rose, and growing numbers of highly in-debted firms found it difficult to service their debts.The government swiftly reduced nominal interestrates, but because inflation declined, real lending ratesstayed between 5 and 10 percent throughout the 1980s.By the mid-1980s Korea had established macroeco-nomic stability: the annual inflation rate fell to 2-3 per-cent, and the fiscal and current account deficits wereeliminated. Industry undertook a major restructuring.The financial sector has grown rapidly in the 1980s,largely owing to the explosive expansion of nonbankinstitutions and securities markets and, to a lesser ex-tent, to growth in the banking sector. The ratio of M3 toGNP almost doubled between 1980 and 1987 (see Boxtable 9.2). Building on this progress, the governmentbegan the full liberalization of bank interest rates in late1988. Most lending rates were freed at that time, al-though deposit rates are still controlled. The govern-ment also announced plans to open Korea's financialmarkets to further foreign participation.

Box table 9.2 Korea's financial sector, 1980, 1984,and 1987(percentage of GNP)

Note: M2 is currency in circulation plus demand, time, and savingsdeposits and residents' foreign currency deposits at the central bankand deposit money banks. M3 is the sum of M2, deposits at non-bank financial institutions, debentures, commercial bills, and certifi-cates of deposit.Source: Bank of Korea and Ministry of Finance, Republic of Korea.

limited and gradual. In Indonesia the major banksare still publicly owned, but the government hasliberalized the credit ceilings and interest rates ofpublic banks and shifted control to the banks'managements. Certain categories of deposit andloan rates, however, remain controlled. Korea alsochanged its financial policy in the 1980s, movingaway from heavy regulation to a more market-oriented approach. These reforms have led torapid growth in the financial sector (see Box 9.2).Financial reforms in Greece, Morocco, Portugal,and Tunisia have included a substantial reductionin directed credit programs, an extensivealthough far from completeliberalization of inter-est rates, and efforts to develop money and capitalmarkets.

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Latin American countries, other than those ofthe Southern Cone, have proceeded much morecautiously. Several countries, particularly Braziland Mexico, were more successful in building bal-anced and diversified institutional structures. Butfinancial reform there and elsewhere in LatinAmerica was hindered by the failure to reduce in-flation.

In Sub-Saharan Africa financial reforms are inplace or under way in several countries, includingCôte d'Ivoire, Ghana, Guinea, Madagascar, Mo-zambique, Nigeria, and Tanzania. The objectivesare to restructure institutions, improve regulatoryprocedures, and prepare the way for a greater reli-ance on markets. The centrally planned economieshave also undertaken some financial reforms that

Indicator 1980 1984 1987

M2 34.2 37.2 41.3M3 48.6 68.1 94.4Corporate bonds 4.5 8.0 10.2Stock market capitalization 6.9 7.8 26.8

involve higher interest rates and somewhat greatercompetition in the provision of services.

Lessons of reform

These attempts at financial sector reform point tocertain pitfalls, although the longer-term benefitsare considerable. The clearest lesson is that re-forms carried out against an unstable macroeco-nomic background can make that instability worse.Complete liberalization of interest rates in coun-tries with high and unstable rates of inflation canlead to high real interest rates and wide spreadsbetween lending and deposit rates. Furthermore,it did not prove possible in unstable economies toprevent the real exchange rate from appreciatingor to keep interest rates in line with the productiv-ity of the real sector. As a result, the removal ofcapital controls allowed volatile capital flows andundermined monetary control.

In contrast, countries with reasonable macroeco-nomic stability were able to avoid the pitfalls ofhigh real interest rates, fluctuations in the real ex-change rate, and insolvency among firms andbanks. Some countries with considerable macro-economic instability chose to liberalize gradually;they retained certain controls on interest rates andcapital flows while encouraging greater competi-tion and adjusting interest rates to reflect marketconditions. These countries also avoided seriousdisruption and achieved rapid growth in their fi-nancial sectors.

A second lesson is that where prices are dis-torted owing to protection or price controls, finan-cial liberalization may not improve the allocation ofresources, which is one of its key objectives. Infact, deregulation may make matters worse bycausing the financial system to respond more flexi-bly to bad signals. For example, Chile's overvaluedexchange rate in the early 1980s greatly favored thenontradables sector, which led to excessive invest-ment in real estate. Financial reform allowed moreresources to flow to that sector. In the subsequentcrisis, real estate was one of the sectors that werehardest hit. Exchange rate realignments and re-forms in trade and public enterprise policy shouldprecede, or at least happen along with, financialliberalization.

A third lesson is that direct intervention in fi-nance must be replaced by an adequate, if less in-vasive, system of laws and regulations. Failure toprovide adequate prudential regulation and bank-ing supervision contributed to financial insolvencyin the Southern Cone, the Philippines, and Tur-

key. In freeing the financial system from heavyeconomic regulation, these countries failed toestablish an adequate system of prudential reg-ulation. In Chile, for example, privatizing bankswithout an adequate framework of prudential reg-ulation allowed them to be acquired by industrialgroups, which used them to make excessive loansto group firms. Effective regulation and supervi-sion by bank management, by market forces, andby public authorities are all necessary to reducerecklessness and fraud.

Financial liberalization, like other reforms, in-volves transfers of wealth and income. Creditorsgain from higher interest rates, and debtors lose.Financial institutions with long-term loans andshort-term deposits can be adversely affected byinterest rate deregulation that results in higherrates. Firms with foreign exchange debt can sufferhuge losses when the currency is devalued. In thelong run the change in relative prices is necessaryto bring about economic adjustment; in the shortrun the losses can be a political and economic ob-stacle to needed reforms. So a fourth lesson is thatthe authorities must anticipate how reforms willchange relative prices and how these changes willaffect different groups. Considerations of equityand political feasibility alike may make it necessaryto provide transitional compensation to those mostadversely affected.

All this suggests that in the initial stages of re-form many developing countries will be unable toliberalize as extensively as some of the high-income countries. Although generalization is haz-ardous, experience to date suggests the followingsteps in moving from a regulated to a more liberalfinancial system. Reform should start by gettingthe fiscal deficit under control and establishingmacroeconomic stability. The government shouldthen scale down its directed credit programs andadjust the level and pattern of interest rates tobring them into line with inflation and other mar-ket forces. In the initial stage of reform the govern-ment should also try to improve the foundations offinancethat is, the accounting and legal systems,procedures for the enforcement of contracts, dis-closure requirements, and the structure of pruden-tial regulation and supervision. It should encour-age managerial autonomy in financial institutions.If institutional insolvency is widespread, the gov-ernment may need to restructure some financialinstitutions in the early stages of reform. Measuresto improve efficiency in the real sectorthat is,more liberal policies toward trade and industryalso ought to be taken at an early stage.

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In the next stage, financial reform should seek topromote the development of a greater variety ofmarkets and institutions and to foster competition.Broader ranges for deposit and lending ratesshould be introduced. On the external side, for-eign entry into domestic financial markets shouldbe encouraged to increase competition andefficiencybut perhaps with restrictions, until do-mestic institutions are able to compete fully. Untilsuch reforms are well under way, it will probablybe necessary to maintain controls on the move-ment of capital. If, however, a country already hasan open capital account, the government shouldgive priority to maintaining macroeconomic stabil-ity to avoid destabilizing capital flows. After sub-stantial progress has been made toward reform,the government can move to the final stage: fullliberalization of interest rates, the elimination ofthe remaining directed credit programs, the relaxa-tion of capital controls, and the removal of restric-tions on foreign institutions.

In sequencing the removal of exchange controls,trade transactions should be liberalized first andcapital movements later. Latin America's experi-ence suggests that liberalizing them simultane-ously is undesirable. The speed of adjustment inthe capital market is faster than in the goods mar-ket. An inflow of capital can lead to an appreciationof the exchange rate, which undermines trade liber-alization. In the end, internal and external liberali-zation will be complementary, but external reformshould wait until internal reform and the recoveryof domestic markets are under way. When macro-economic stability has been established and the do-mestic financial system has been liberalized anddeepened, it will be safe to allow greater freedomfor foreign institutions and capital flows, to link thedomestic and international financial markets.

If the reform process as a whole is too quick,firms that entered into contracts and arrangementsunder the old rules and that would otherwise beviable may face heavy losses. A gradual liberaliza-tion will also impose losses, but it will allow firmstime to adjust and financial institutions time to de-velop the new skills they will need. Undue delay,however, carries the cost of perpetuating the ineffi-ciencies of financial repression. The appropriatebalance must be judged in each case. Here, at anyrate, generalization is not helpful.

Components of financial reform

Many countries have taken the first steps towardreforming their financial systems. The elementsnecessary to take the process further will vary, de-

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pending both on economic circumstances and onpolitical possibilities. This section reviews themain components of a broadly conceived programof financial reform.

Financing fiscal deficits

Macroeconomic stability depends on reducingpublic deficits to a level that can be financed bymeans other than inflation or other taxes on thefinancial sector. Central government deficits havein recent years been equivalent to about one-fifthof total government spending for a large sample ofdeveloping countries. About half of this total wasfinanced by borrowing from central banks. The re-sulting monetary expansion caused high inflationin many countries. Government borrowing fromthe domestic banking system through high reserveand liquidity requirements is less inflationary thanborrowing from the central bank, but it reducesbank profitability, distorts interest rates, andcrowds out private sector borrowers. To the extentthat a government finances its deficit domestically,borrowing from a securities market is thereforepreferable to forced borrowing from financial insti-tutions, which in turn is preferable to borrowingfrom the central bank.

In most countries it is possible to start a marketfor government bills, provided the government iswilling to pay the market interest rate. Indeed,several developing countries, including Indonesia,the Philippines, and Sri Lanka, have establishedshort-term government securities markets. This isdesirable not only because borrowing from such amarket is less inflationary than borrowing frombanks but also because a bills market makes it pos-sible for the government to engage in open marketoperations. These can be used to manage the mon-etary and credit aggregates without the distortionsentailed by direct controls. A government billsmarket is also a first step toward building a broadermarket for corporate securities. Once market par-ticipants have become familiar with owning andtrading government instruments and the infra-structure of brokers and traders is in place, it isrelatively easy for the private sector to issue itsown securities. And by borrowing from a bills mar-ket instead of from the insurance and pension sys-tems, governments free long-term funds for in-vestment in private sector assets.

Interest rate policy

Studies suggest that rigid ceilings on interest rateshave hindered the growth of financial savings and

reduced the efficiency of investment. High andvolatile inflation worsens their impact. In mostcountries this overall rigidity has been com-pounded by a pattern of interest rates that failed todiscriminate between borrowers on the basis ofloan maturity, risk, or administrative cost. Govern-ments have often told banks to charge lower inter-est rates on loans to small borrowers and on loansof longer maturity. Growing recognition of theharm that administered interest rates can causehas recently led many governments to give marketforces a bigger say. Governments in developingand developed countries alike have deregulated in-terest rates during the past decade.

li the initial conditions are wrong, however, lib-eralization may fail to bring about the correct pat-tern of interest rates. In countries that have not yetbeen restored to macroeconomic stability, govern-ments may need to continue managing interestrates. In such cases the aim should be to adjustinterest rates to reflect changes in inflation and ex-change rates. Countries with open economiesneed to pay close attention to the differentials be-tween domestic and international rates. Beyondthat, governments should phase out preferentialinterest rates. When good progress has been madetoward establishing macroeconomic stability, liber-alizing industry, and restructuring the financialsystem, the government might then move towarda more thoroughgoing liberalization of interestrates. Some countries began by setting ranges andallowing banks to fix their rates within them. Asliberalization moved to later stages, the rangeswere widened and then removed.

Directed credit

In most developing countries government inter-vention in the allocation of credit has been exten-sive. Although a degree of intervention may havebeen useful during the early stages of develop-ment, many countries have come to recognizethat this policy has had an adverse effect on indus-trial and financial development. The evidence sug-gests that directed credit programs have been aninefficient way of redistributing income and ofdealing with imperfections in the goods market.Some programs that were well designed andnarrowly focused, however, have been reasonablysuccessful in dealing with specific imperfections inthe financial markets, such as a lack of risk capital.In the future, governments should attack theconditions that made directed credit appeardesirableimperfections in markets or extremeinequalities in incomeinstead of using di-

rected credit programs and interest rate subsidies.Many governments are unwilling to eliminate di-

rected credits entirely but are nonetheless increas-ing the flow of credit to the private sector and re-ducing their own role in credit allocation. Twoprinciples should guide the design of any remain-ing programs. First, there can be only a limitednumber of priority sectors: a wide variety of di-rected credit programs means that nothing is beinggiven priority. Second, governments should beconscious of how little information they have inrelation to the information they would need toprice credit for different sectors appropriately.

With regard to interest rates, the aim should beto eliminate the difference between the subsidizedrate and the market rate. The lowest interest rateshould not be less than the rate charged by thecommercial banks to prime borrowers. Increasingthe availability of credit to priority sectors shouldbe the main focus of the remaining directed creditprograms, since experience has shown that gener-ous subsidies badly distort the allocation of re-sources.

Charging nonprime borrowers the prime rateimplies a subsidy to the extent of the added riskand administrative costs. Instead of forcing thebanks to cover these costs by charging other bor-rowers more or paying depositors less, the author-ities would be better advised to bear the coststhemselves. Directed credit administered throughcentral bank rediscounts rather than throughquantitative allocations forced on the banks pro-motes voluntary lending. Governments shouldnot, however, let central bank rediscounts becomea significant source of monetary expansion. Sec-tors that require large subsidies should be dealtwith in the budget, not through credit allocation.

Finally, it seems more defensible to provide di-rected credits for certain activities (for example, ex-ports or research and development) or for specificsorts of financing such as long-term loans than totarget specific subsectors such as textiles or wheat.Targeting specific sectors is too risky in a world ofshifting comparative advantage.

Institutional restructuring and development

Many financial institutions today are insolvent,and successful financial reform requires that theybe restructured. Insolvent institutions allocate newresources inefficiently because their aim is to avoidimmediate bankruptcy rather than to seek out cus-tomers with the best investment opportunities. Be-cause financial institutions often become insolventas a result of ill-advised policies toward trade and

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industry, policy reforms and the restructuring ofindustrial companies may also be necessary. Gov-ernments should not simply recapitalize the insol-vent financial institutions but should seize the op-portunity to restructure the financial system in linewith the country's future needs.

Liberalization should not be limited to the re-form of the banking system but should seek todevelop a more broadly based financial systemthat will include money and capital markets andnonbank intermediaries. A balanced and competi-tive system of finance contributes to macroeco-nomic stability by making the system more robustin the face of external and internal shocks. Activesecurities markets increase the supply of equitycapital and long-term credit, which are vital to in-dustrial investment. Experience in countries suchas Malaysia and the Philippines suggests that theliberalization of commercial banking will not addmuch by itself to the availability of long-term creditand equity capital. In Korea, by contrast, the rapidgrowth of the securities market and the develop-ment of new nonbank institutions substantiallyimproved the supply of long-term credit eventhough only limited liberalization of the bankingsystem took place.

In many developing countries today the financialinstitutions in the most distress are part of the pub-lic sector. Privatization of government banks is oneway of improving their efficiency. But this courseshould be followed only after the quality of bankportfolios and the regulatory framework have im-proved. In some countries thin capital marketsmean that selling bank shares to a large number ofindividuals is hardly feasible. Hence privatizationof public banks may simply shift the ownership ofthe bank from the government to large industrialgroups. That would increase economic concentra-tion and undermine sound bankingas Chile dis-covered in the late 1970s. In small countries withfew banks and weak regulation and supervision,greater foreign participation in bank ownershipand management (as in Guinea of late) is wellworth considering.

Where public institutions are not privatized,other steps should be taken to improve efficiency.It is important that managers of public banks beprofessionals with autonomy and accountability;clear procedures will be needed that keep govern-ment interference in individual loan decisions, as-set management, and personnel policy to a mini-mum. It is equally important that public banks notbe shielded from prudential regulation.

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External financial policy

Financial reforms have been undertaken in inter-national as well as domestic markets. Many high-income countries have eased their capital controlsand cut restrictions on the entry of foreign inter-mediaries. The result has been an increase in cross-border financial flows and in foreign participationin domestic markets. Conversely, the developmentof offshore markets has reinforced the trend to-ward deregulation in domestic markets. Offshorefinancial markets have grown much more quicklythan domestic markets in recent yearsa sign ofthe pace at which finance is becoming an inte-grated global industry. International bank lendingand net issues of international bonds grew twoand a half times faster than GNP in the high-income countries during 1976-86.

The growing importance of international financeis also reflected in the rise in the share of foreignloans, or of purchases of foreign securities, inbanks' transactions. For example, the ratio of ex-ternal assets to total assets for banks in the high-income countries rose from 14 percent at the end of1975 to 19 percent at the end of 1985. External fi-nance went mainly to firms in high-income coun-tries, but some of the growth represents commer-cial bank lending to the now overly indebteddeveloping countries. Similarly, the greater partici-pation of foreign financial institutions has been ev-ident in most major markets. The number of for-eign banking firms in the high-income countrieshas increased sharply. The ratio of the assets offoreign banks to the assets of all banks increased inBelgium from 8 percent at the end of 1960 to 51percent at the end of June 1985, in France from 7 to18 percent, in the United Kingdom from 7 to 63percent, and in Luxembourg from 8 to 85 percent.In the United States the ratio increased from 6 per-cent at the end of 1976 to 12 percent in mid-1985.

Advances in telecommunications and data pro-cessing have driven these changes, which arelikely to prove irreversible. The greater interna-tional mobility of capital, the globalization of finan-cial markets, and the development of new financialinstruments have rendered a closed financial poi-icy costly and largely ineffective. To varying de-grees, developing countries have participated inthe trend toward more open and integrated finan-cial markets, partly in response to the growing eco-nomic integration brought about by trade, tour-ism, and migrant labor. Some countries haveadopted foreign currency deposit schemes to in-

duce a greater flow of remittances from migrantworkers. To encourage remittances and to discour-age and, if possible, reverse capital flight, coun-tries will need to make domestic financial assetscompetitive in yield with foreign assets. Achievingmacroeconomic stability with positive real rates ofinterest and a realistic exchange rate will also en-courage foreign investors to increase direct andportfolio investments.

The merging of domestic and international fi-nance has certain advantages for any country. For-eign competition forces domestic institutions to bemore efficient and to broaden the range of servicesthey offer. It can also accelerate the transfer of fi-nancial technology, which is especially importantfor developing countries. The countries that suc-ceed in integrating their markets with the rest ofthe world will gain greater access to capital and tofinancial services such as swaps, which will permitthem to diversify their risks. But opening financialmarkets also poses problems. If it is done prema-turely, it can lead to volatile financial flows that canmagnify domestic instability. Free entry of foreigninstitutions can lead to the disintermediation ofhigh-cost domestic banks. Furthermore, interna-tionalization means giving up a large degree of au-tonomy in domestic monetary and financial policy.Domestic deposit and lending rates can be kept inline with world rates only if reserve requirementsand banks' costs of intermediation are in line withthose in other countries.

ENTRY OF FOREIGN FINANCIAL INSTITUTIONS. Atti-

tudes toward licensing foreign banks and other fi-nancial institutions vary widely among developingcountries. A few exclude foreign financial institu-tions; others permit representative offices but notbranches. At the other extreme, the Bahamas, Bah-rain, Hong Kong, Panama, and Singapore viewexports of financial services as a source of employ-ment and foreign exchange. They either allow for-eign institutions to operate under the same rules asdomestic banks or provide liberal rules for offshorefinancial institutions.

Maximizing the benefits of foreign entry requiresthe deregulation of domestic financial institutionsand the establishment of a competitive environ-ment. Artificially low interest rates, directedcredit, barriers to entry, and other impediments tocompetition make it likely that foreign intermedi-aries will simply capture monopoly rents ratherthan promote competition and efficiency. Wheremarkets are not fully liberalized and domestic

banks have not been restructured, foreign partici-pation may be beneficial, but some restrictions willremain necessary to prevent excessive disinterme-diation by local banks.

CAPITAL FLOWS. The integration of domestic andworld financial markets requires freer trade notonly in financial services but also in financial as-sets. Restrictions on capital flows have been re-laxed in many developing countries, generally aspart of broader programs of reform. Capital flowsare already quite free in Argentina, Chile, Malay-sia, Mexico, the Philippines, Thailand, Uruguay,and Francophone Africa. A growing number of de-veloping countries are encouraging foreign partici-pation in their domestic securities markets. Since1980 more than thirty closed-end funds have beenestablished as a means for foreigners to invest indeveloping country equities.

Capital movements to and from the developingcountries are already substantial. In 1982, for ex-ample, more than a quarter of cross-border banklending went to developing countries. (In more re-cent years the flows have, of course, been muchsmaller.) The developing countries' stock of out-standing foreign debt is very large$1, 176 billionat the end of 1988, of which more than half waslent by commercial sources. In 1987 the recordedamount of foreign bank deposits held by residentsof developing countries was $290 billion; this isundoubtedly an understatement of capital heldabroad. Economic agents in many developingcountries have been borrowing and depositingmore abroad than in their own banks. This partlyreflects the natural international diversification ofportfolios, but to a greater extent it reflects effortsto avoid the repressed yields of domestic financialsystems.

The scale of capital flows to and from developingcountries does not mean that their financial mar-kets have been substantially open. On the con-trary, many developing countries continue to re-strict outward capital flows in an attempt to directmore domestic funds to domestic investment. Fur-thermore, fears that foreigners would gain controlof domestic corporations have led to restrictions oninward portfolio investment in new ventures.

Although the capital market should not beopened prematurely, freer capital movements willpromote better alignment of domestic interestrates with international rates, increase the avail-ability of funds from abroad, and provide moreopportunities for risk diversification.

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Conclusions of the Report

This Report has tried to capture the essentials ofthe complex field of finance. In at least two re-spects it fails to do justice to the subject. First, toooften the developing countries have been dis-cussed as though they were all alike, when in factpolicies and experience vary widely among coun-tries. Second, the Report has treated in a perfunc-tory way the human and political dimensions ofthe subject, both in discussing the origins of thefinancial problem and in offering prescriptions forchange.

Unlike the problems of industry, those of financeare not frozen in bricks and mortar, plant and ma-chinery. Financial claims, together with the all-important "rules of the game," could be rewrittenovernight by government decree. But this is not toimply that reforming a country's financial systemcan be accomplished quickly or easily. Time isneeded for people to acquire the necessary skills inaccounting, management, and bank supervision.Training staff, building new institutions, andperhaps hardest of allgetting people to revisetheir expectations have proved among the greatest

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challenges to development. Moreover, change iscertain to encounter political opposition: peoplebenefiting from the present arrangements will re-sist reform. Othersalthough they stand to benefitin the long runwifi be hurt in the short run andmay not choose to make the sacrifices demandedtoday for uncertain gains in the future. Changemay be most resisted in the very countries where itis most necessary.

Once reform is under way, the response will notbe immediate; indeed, it may be painfully slow.After prolonged periods of inflation and manyfailed attempts to control it, the public will expectinflation to continue and will behave accordingly.Entrepreneurs unpersuaded of the permanence ofnew policy will be slow to change their ways.

This Report has tried to specify the prerequisitesfor building an efficient financial system capable ofmobilizing and allocating resources on a voluntarybasis. Such a system would continue to make mis-takes and waste resources. But it would probablymake fewer mistakes and waste fewer resourcesthan the interventionist approach followed inmany developing countries today.

This Report has drawn on a wide range of WorldBank reports and on numerous outside sources.World Bank sources include ongoing research, aswell as country economic, sector, and projectwork. The principal sources for each chapter arenoted below. These and other sources are thenlisted alphabetically by author or organization intwo groups: background papers commissioned forthis Report and a selected bibliography. The back-ground papers, some of which will be availablethrough the Policy, Planning, and Research (PPR)Working Paper series, synthesize relevant litera-ture and Bank work. The views they express arenot necessarily those of the World Bank or of thisReport.

In addition to the principal sources listed, manypersons, both inside and outside the World Bank,helped with the Report. In particular, the coreteam wishes to thank Paul Beckerman, GerardCaprio, Alan Gelb, and Patrick Honohan for theirextensive support. Others who provided notes ordetailed comments include Robert Aliber, JeanBaneth, Charles Blitzer, Robert Buckley, AnthonyChurchill, Mansoor Dailami, William Easterly,Mark Gertler, Manuel Hinds, Thomas Hutcheson,Melanie Johnson, Deena Khatkhate, JohannesLinn, Linda Lowenstein, Carlos Massad, DianeMcNaughton, John Odling-Smee, Guy Pfeffer-mann, Vincent Polizatto, Paul Popiel, Sarath Raja-patirana, Bertrand Renaud, and Alain Soulard.

Chapter 1

Data in this chapter were drawn mainly from IMF,OECD, and World Bank sources. Backgroundsources for the analysis of the international eco-nomic environment include Fardoust 1989 andwork by the International Commodity Marketsand International Economic Analysis and Pros-pects divisions of the International Economics De-partment of the World Bank. The analysis of struc-tural adjustment relies on World Bank 1988a.Shahrokh Fardoust was particularly helpful on thesection concerning prospects for growth. AhmadJamshidi, Robert Lynn, and Christian Petersen cre-ated the debt reduction scenarios. Box 1.1 wasdrafted by André Sapir. Box 1.3 benefited fromcomments by Oey Meesook. Desmond McCarthyprovided useful comments on the chapter.

Chapter 2

The section "Finance and growth" draws particu-larly on the background papers by Balassa, Bhatt,Gelb, Honohan and Atiyas, and Neal; the seminalclassics McKinnon 1973 and Shaw 1973; the workof Khatkhate (particularly 1972); and Fry 1988. Inaddition, it benefited from Asian DevelopmentBank 1985, Fischer 1987, Haque 1988, Jung 1986,Lanyi and Saracoglu 1983, Modigliani 1986, Rossi1988, Sundararajan 1987, and White 1988. The sec-

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tion "Risks and costs of finance" draws primarilyon the background paper by Mayer and on Balten-sperger and Devinney 1985, North 1987, Tobin1984, and Williamson 1985. The section "Govern-ment intervention" draws primarily on Bernanke1983 and Kaufman 1988. Box 2.1 is based on ma-terial supplied by Alan Gelb and Gerard Caprio.Jacques Polak provided useful comments on thechapter.

Chapter 3

The discussion of the historical evolution of finan-cial systems in high-income countries draws exten-sively on Born 1983; Cameron 1967 and 1972;Goldsmith 1969, 1985, and 1987; and Kindleberger1978 and 1984. For developing countries prior tothe 1940s, the discussion is based mainly on Sayers1952, Crick 1965, Newlyn and Rowan 1954, Okigbo1981, Diaz-Alejandro 1982 and 1985, Joslin 1963,Young 1925, and Fetter 1931. The discussion ofpostwar developments in high-income countries isbased mainly on Vittas 1978, Bank for InternationalSettlements 1986, Watson and others 1988, and Su-zuki and Yomo 1986. Box 3.2 was drafted by PaulBeckerman. Charles Kindleberger provided de-tailed comments on the chapter.

Chapter 4

This chapter draws heavily on World Bank andIMF sources. The section "Government interven-tion in credit allocation" also benefited from Vir-mani 1982; Diamond 1957 and 1968; Levitsky andPrasad 1987; Levitsky 1986; Hanson and Neal1987; Nair and Fiippides 1988; Von Pischke, Ad-ams, and Donald 1983; Adams, Graham, and VonPischke 1984; and Gordon 1983. The section "Mac-roeconomic policies and financial development"draws on Hanson and Neal 1987, Easterly 1989,Fischer 1986, Jud 1978, Hinds 1988, and Polak1989. Box 4.3 is based on Vogel 1984a. Box 4.4 wasdrafted by Vincent Rague and Moina Varkie, Boxes4.5 and 4.8 by Paul Beckerman, and Box 4.6 byPatrick Honohan. Box 4.7 is based on Cole andPark 1983 and unpublished material by Jia-DongShea and Ya-Hwei Yang and by Juro Teranishi. Al-berto Musalem provided useful comments on thechapter.

Chapter 5

The information in this chapter comes primarilyfrom World Bank databases, financial sector re-

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ports, and contributions from operational staff.Atiyas 1989 and the background papers by Al-Sultan, Antoniades and Kouzionis, Larrain,Montes-Negret, Sheng, Silverberg, Sundaravejand Trairatvorakul, and Tenconi provided informa-tion on specific countries. The discussion of finan-cial distress and its consequences draws heavily onHinds 1988. The discussion of financial restruc-turing draws on the background paper by de Juanand an unpublished paper by Alfredo Thorne.Veneroso 1986 and de Juan 1987 were also helpful.Box 5.3 is based on de Juan 1987, and Box 5.6 isbased on material prepared by Jorge Martins.

Chapter 6

This chapter draws extensively on the Bank's oper-ational experience with financial institutions andsystems in developing countries. The discussion ofproperty rights, contracts, economic institutions,and legal systems draws on Williamson 1985,North 1981, Furubotn and Pejovich 1974, Posner1977, von Mehren and Gordley 1977, and the Inter-national Encyclopedia of Comparative Law (Interna-tional Association of Legal Science). The discus-sion of company law and corporate governancedraws on Grossfeld and Ebke 1978 and Bacon andBrown 1977. Dalhuisen 1986 is the main source onbankruptcy laws. The section on accounting drawson Nobes and Parker 1985 and a background noteby Maurice Mould. The discussion of banking leg-islation, regulation, and supervision draws on thebackground papers by Effros and Polizatto. Box 6.1draws on Song 1983, Box 6.2 on Feder and others1988, and Box 6.3 on Iqbal and Mirakhor 1987. Box6.4 was drafted by Akhtar Hamid, Box 6.5 byHarry Snoek, and Box 6.6 by the Bank's Legal De-partment. Ibrahim Shihata, Ahmed Jehani, HansJurgen Gruss, and other staff of the Bank's LegalDepartment and Robert C. Effros and Harry Snoekof the IMF provided valuable comments on thechapter.

Chapter 7

This chapter draws on a wide range of sources,including those cited for earlier chapters. The dis-cussion of business finance draws on the back-ground paper by Mayer and on Aoki 1984, Cable1985, Corbett 1987, Edwards 1987, and others. Thehousehold finance discussion draws on the back-ground papers by Buckley and Renaud. The dis-cussion of institution building draws on the opera-tional experience of the Bank and on the

background papers by the Capital Markets Depart-ment of the IFC, de Juan, Ibanez, Polizatto, Reilly,and Skully. Other useful sources are Davis 1985,Hector 1988, Sprague 1986, and van Agtmael 1984.Box 7.1 is based on Goldsmith 1985 and nationalaccounts data; Box 7.2 on the background paper byMayer and on Mayer 1987, Modigliani and Miller1958, and others; Box 7.4 on the background paperby Buckley; and Box 7.8 on the background paperby Kar. Box 7.3 was drafted by Salman Shah andBox 7.5 by Brian Dickie. Tarsicio Castaneda andRoland Tenconi provided material for the otherboxes.

Chapter 8

The discussion of microenterprises draws on pa-pers presented at the 1988 World Conference on"Support for Microenterprises" and particularlyon Chandavarkar 1988, Meyer 1988, and Seibel1988. Liedholm 1985 also provided backgroundmaterial for this section. The discussion of the fi-nancial needs of small farmers and of the financialarrangements available to them is based on thework of Dale Adams and The Ohio State Univer-sity Rural Finance Group. The discussion of thefinancial needs of and services to the noncorporatesector draws on an unpublished manuscript byJ. D. Von Pischke. The material on trader financingdraws on Larson 1988. The discussion of grouplending and cooperative finance is based onWieland 1988 and Vogel 1988. Hans Dieter Seibelprovided material for the section on the links be-tween informal and formal finance. Box 8.1 isbased on a background note by Douglas Graham,Box 8.2 on a background note by Dale Adams, Box8.3 on a background note by Richard Meyer, andBox 8.5 on background notes by Susan Goldmark.Background material was also provided by JohnGadway, Bruce Gardner, Claudio Gonzalez-Vega,Mario Massini, H. J. Mittendorf, and GlennPederson.

Chapter 9

The data used in this chapter were drawn mainlyfrom IMF publications and World Bank sources.The discussion of recent experiences with financialreform and the lessons of reform benefited fromAtiyas 1989, Corbo and de Melo 1985, Edwards1984, Fry 1988, McKinnon 1988a and 1988b,McKinnon and Mathieson 1981, Velasco 1988, andthe background papers by Balassa, and Cho andKhatkhate. The discussion of interest rate policy

benefited from McKinnon 1988a and 1988b andLeite and Sundararajan 1988. The discussion of in-stitutional restructuring and development bene-fited from a background note by Alan Geib. Thesection on external financial policy uses data andmaterial from Watson and others 1988. Box 9.1 wasdrafted by Murray Sherwin and Gerald Halliday.

Background papers

These papers are available from the World Develop-ment Report office, World Bank, Washington, D.C.

Al-Sultan, Fawzi H. "Averting Financial Crisis:The Case of Kuwait."

Antoniades, Dimitris, and Dimitris Kouzionis. "Fi-nancial Distress of Industrial Firms in Greeceand Their Impact on the Greek Banking Sys-tem."

Balassa, Bela. "The Effects of Interest Rates onSavings in Developing Countries."

"Financial Liberalization in DevelopingCountries."

Bhatt, V V "On Financial Innovations and CreditMarket Evolution."

"On Participating in the InternationalCapital Market."

Buckley, Robert. "Housing Finance in DevelopingCountries: A Transaction Cost Approach."

Capital Markets Department, International Fi-nance Corporation. "Attractiveness of EmergingMarkets for Portfolio Investment."

"Debt to Equity Conversion.""Leasing."

Cho, Yoon Je, and Deena Khatkhate. "Lessonsfrom Financial Liberalization in Asia and LatinAmericaA Comparative Study."

de Juan, Aristobulo. "Does Bank Insolvency Mat-ter?"

Effros, Robert C. "Financial Sector Study: The Re-lationship between Law and Development."

Gelb, Alan. "Financial Policies, Efficiency, andGrowth: An Analysis of Broad Cross-Section Re-lationships."

Honohan, Patrick, and Izak Atiyas. "IntersectoralFinancial Flows in Developing Countries."

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7

The tables in this statistical appendix present sum-mary data on the population, national accounts,trade, and external debt of the low- and middle-income economies, the high-income economies,and all reporting economies as a group. Readers

Table A.1 Population growth, 1965 to 1987, and projected to 2000

Statistical appendix

should refer to the "Definitions and data notes"for an explanation of the country groupings and tothe technical notes to the World Development In-dicators for definitions of the concepts used.

145

Country group

1987population(millions)

Average annual growth (percent)

1965-73 1973 -80 1980-87 1987-90 1990-2000

Low- and middle-income economies 3,859 2.5 2.1 2.0 2.1 1.9Low-income economies 2,820 2.5 2.1 2.0 2.1 1.9Middle-income economies 1,039 2.4 2.3 2.2 2.1 1.9

Sub-Saharan Africa 442 2.6 2.8 3.1 3.3 3.1East Asia 1,511 2.7 1.7 1.5 1.6 1.5South Asia 1,079 2.4 2.4 2.3 2.2 1.9Europe, Middle East, and North Africa 390 2.0 2.1 2.1 2.0 2.0Latin America and the Caribbean 404 2.6 2.4 2.2 2.1 1.9

17 highly indebted countries 582 2.6 2.4 2.4 2.3 2.2

High-income economies 776 1.0 0.8 0.7 0.6 0.5OECD members 746 1.0 0.7 0.6 0.5 0.4

Total reporting economies 4,635 2.2 1.9 1.8 1.8 1.7Oil exporters 578 2.7 2.8 2.7 2.6 2.5

Table A.2 Population and GNP per capita, 1980, and growth rates, 1965 to 1988

a. Preliminary. b. Figures after 1980 exclude Iran and Iraq.

Table A.3 Population and composition of GD!', selected years, 1965 to 1988

146

(billions of dollars, unless otherwise specified)

Country group and indicator 1965 1973 1980 1984 1985 1986 1987 1988a

Low- and middle-income economiesGDP 373 841 2,387 2,469 2,496 2,565 2,798 3,053Domestic absorption" 374 838 2,423 2,452 2,489 2,567 2,800Net exports' -2 2 -36 17 7 -2 -2Population (millions) 2,375 2,895 3,354 3,635 3,705 3,782 3,859 3,918

Low-income economiesGDP 162 305 771 799 815 775 793 893Domestic absorption" 164 304 777 808 843 800 807Net exports' -2 1 -5 -10 -28 -26 -14Population (millions) 1,745 2,131 2,459 2,660 2,709 2,764 2,820 2,878

Middle-income economiesGDP 208 534 1,616 1,670 1,681 1,800 2,024 2,172Domestic absorption" 208 532 1,646 1,644 1,645 1,778 2,022Net exports' 0 2 -30 27 35 22 2Population (millions) 630 764 894 975 996 1,017 1,039 1,040

Sub-Saha ran AfricaGDP 28 63 207 184 185 154 137 146Domestic absorption" 28 62 205 184 185 160 140Net exports' 0 1 2 -0 1 -5 -4Population (millions) 239 294 356 403 415 428 442 456

East AsiaGDP 91 212 573 640 629 630 709 852Domestic absorptionb 91 210 576 631 630 613 673Net exports' 0 2 -4 9 -1 17 35Population (millions) 980 1,207 1,362 1,446 1,465 1,487 1,511 1,515

South AsiaGDP 65 93 221 253 277 2% 320 316Domestic absorption" 67 94 232 264 291 307 330Net exports' -2 -1 -12 -11 -14 -11 -10Population (millions) 647 783 923 1,010 1,033 1,056 1,079 1,103

Europe, Middle East, and North Africa"GDP 74 186 473 458 470 525 561 567Domestic absorption" 74 185 487 473 487 556 607Net exports' -0 1 -15 -15 -17 -31 -45Population (millions) 250 292 338 367 374 382 390 398

1980 GNP(billions

Count ry group of dollars)

1980population(millions)

1980 GNPper capita(dollars)

Average annual growth of GNP per capita (percent)

1965-73 1973 -80 1980-85 1986 1987 1988

Low- and middle-incomeeconomies 2,347 3,354 700 4.1 2.7 1.2 2.7 2.5 3.5

Low-income economies 765 2,459 310 3.3 2.6 3.9 3.6 3.0 6.5Middle-income economies 1,582 894 1,770 4.6 2.6 -0.3 2.1 2.1 2.5

Sub-Saharan Africa 200 356 560 3.1 0.5 -3.7 0.8 -4.4 -0.2East Asia 566 1,362 420 5.1 4.6 6.4 5.8 6.8 9.3South Asia 221 923 240 1.4 2.0 2.9 2.2 0.9 5.6Europe, Middle East, and

North Africa" 591 338 1,730 6.0 2.4 0.0 1.0 -0.2 0.1LatinAmericaandtheCaribbean 698 347 2,010 4.1 2.5 -2.2 1.8 1.9 -0.9l7highlyindebtedcountries 892 494 1,810 4.2 2.6 -2.6 1.7 0.5 -1.0

High-income economies 7,961 741 10,740 3.5 2.2 1.5 2.0 2.8 3.0OECD members 7,698 716 10,750 3.5 2.1 1.7 2.1 2.7 3.3

Total reporting economies 10,308 4,095 2,520 2.7 1.5 0.6 1.3 1.8 2.6Oil exporters 951 479 1,980 4.7 2.7 -2.3 -2.7 -1.3

Table A.3 (continued)

Note: Components may not sum to totals because of rounding.Preliminary.Private consumption plus government consumption plus gross domestic investment.Includes goods and nonfactor services.Figures after 1980 exclude Iran and Iraq.

Table A.4 GDP, 1980, and growth rates, 1965 to 1988

147

Country group and indicator 1965 1973 1980 1984 1985 1986 1987 1988

Latin America and the CaribbeanGD? 99 253 716 673 682 700 773 837

Domestic absorption" 98 254 726 639 651 683 762

Net exportsc 1 -0 -10 34 31 17 11

Population (millions) 239 294 347 379 387 395 404 412

17 highly indebted countriesGDP 121 300 915 816 826 825 877 934

Domestic absorption" 119 299 921 778 789 805 861

Net exports' 1 1 -6 38 38 20 16

Population (millions) 341 419 494 543 556 569 582 596

High-income economiesGDP 1,412 3,340 7,914 8,543 8,933 10,860 12,570 13,963

Domestic absorption" 1,403 3,309 7,859 8,517 8,906 10,805 12,536

Net exports' 9 31 55 26 27 55 34

Population (mfflions) 646 700 741 762 767 772 776 781

OECD membersGDP 1,397 3,293 7,654 8,284 8,693 10,633 12,329 13,695

Domestic absorption" 1,389 3,267 7,662 8,263 8,669 10,570 12,286

Net exports' 8 26 -8 21 24 62 43

Population (millions) 632 681 716 734 738 742 746 749

Total reporting economiesGD? 1,786 4,186 10,300 11,011 11,431 13,465 15,428 17,125

Domestic absorption" 1,779 4,154 10,279 10,969 11,398 13,418 15,410

Net exportsc 7 31 20 42 33 47 18

Population (millions) 3,021 3,595 4,095 4,397 4,472 4,554 4,635 4,699

Oil exportersGDP 78 226 966 993 1,011 855 855

Domestic absorption" 76 211 863 957 985 877 863

Net exports' 3 15 102 36 26 -21 -7Population (millions) 321 396 479 534 548 563 578 593

Country group

1980GDP

(billionsof dollars)

Average annual growth of GDP (petvent)

1965-73 1973 -80 1980-85 1986 1987 1988

Low- and middle-income economies 2,387 6.6 4.9 3.4 4.7 4.2 5.0

Low-income economies 771 6.0 4.7 5.9 5.8 5.4 8.6

Middle-income economies 1,616 6.9 5.1 2.2 3.9 3.4 2.6

Sub-Saharan Africa 207 6.1 3.2 -0.5 3.2 -1.3 3.1

East Asia 573 7.9 6.5 7.8 7.3 8.6 9.4

South Asia 221 3.8 4.4 5.4 4.6 3.1 7.6

Europe, Middle East, and NorthAfrica" 591 7.6 4.3 2.3 3.1 1.9 2.6

LatinAmericaandtheCaribbean 716 6.4 5.2 0.5 3.6 2.7 1.0

17 highly indebted countries 915 6.6 5.2 0.2 3.5 1.7 1.5

High-income economies 7,913 4.6 2.9 2.3 2.6 3.4 3.7

OECD members 7,655 4.5 2.8 2.4 2.7 3.3 3.7

Total reporting economies 10,302 4.9 3.3 2.6 3.1 3.6 4.0

Oil exporters 964 7.4 5.0 0.8 -0.9 1.3

a. Preliminary.b. Figures after 1980 exclude Iran and Iraq.

Table A.5 GDP structure of production, selected years, 1965 to 1987

148

Note: Figures in italics are for years other than those specified.a. Figures after 1980 exclude Iran and Iraq.

(percentage of GDP)

1965 1973 1980 1984 1985 1986 1987'

Agri-cul- Indus-

Count ry group ture try

Agri- Agri-cul- Indus- cul-ture try ture

Agri-Indus- cul-

try tureIndus-

try

Agri-cul-ture

Indus-try

Agri-cul-ture

Agri-Indus- cul-

try tureIndus-

try

Low- and middle-incomeeconomies 29 30 23 34 19 38 19 35 19 36 18 35 17Low-income economies 41 26 37 31 32 36 33 33 31 33 31 32 30 35Middle-income economies 19 32 15 35 12 38 12 37 12 37 13 36

Sub-Saharan Africa 40 18 33 24 28 32 33 26 33 26 33 23 31 26East Asia 37 34 31 40 26 44 25 41 23 42 23 43 21 45South Asia 42 19 45 18 35 22 31 24 30 24 29 25 28 25Europe, Middle East, and

North Africab 22 32 16 38 14 41 13 39 13 14 15

Latin America and theCaribbean 15 32 12 33 9 36 10 35 10 35 11 35

17 highly indebtedcountries 18 31 15 33 12 36 14 35 14 35 13 34

High-income economies 5 40 5 38 3 37 3 35 3 35 3 34 3 34OECD members 5 40 5 38 3 37 3 35 3 34 3 34 3 34

Total reporting economies 10 38 8 37 7 37 6 35 6 35 6 34 6 34Oil exporters 19 32 14 38 11 47 13 40 13 38 13 35

a. Preliminary.b. Figures after 1980 exclude Iran and Iraq.

Table A.6 Sector growth rates, 1965 to 1987(average annual percentage change)

Agriculture industry Services

Country group 1965-73 1973 -80 1980-87 1965-73 1973 -80 1980-87 1965-73 1973 -80 1980-87

Low- and middle-incomeeconomies 3.1 2.6 3.4 8.8 4.9 5.1 7.1 6.4 3.4

Low-income economies 3.0 2.1 4.0 10.6 6.9 8.6 5.9 4.9 5.2Middle-income economies 3.3 3.3 2.5 8.0 4.0 2.9 7.5 6.9 2.8

Sub-Saharan Africa 2.4 0.3 1.2 13.5 4.7 -1.2 4.1 3.6 1.5East Asia 3.2 3.0 5.9 12.7 9.3 10.1 9.2 6.4 6.4South Asia 3.4 2.4 1.4 3.7 5.4 7.2 3.9 5.7 6.1Europe, Middle East,

and North Africa' 3.5 3.1 2.4 8.7 1.6 1.9 8.3 8.5 3.2Latin America and the

Caribbean 2.9 3.7 2.2 6.9 4.8 0.8 7.1 6.3 1.3

17 highly indebtedcountries 3.0 2.2 1.8 8.0 5.2 0.2 7.2 6.2 1.2

High-income economies 1.4 0.5 2.5 3.9 2.2 1.9 4.5 3.4 3.0OECD members 1.4 0.5 2.4 3.7 2.0 2.3 4.5 3.3 3.0

Totalreportingeconomies 2.5 1.8 3.2 4.8 2.8 2.5 4.9 3.9 3.1Oil exporters 3.3 2.2 2.4 9.4 3.3 -1.5 6.4 8.0 2.7

Table A.7 Consumption, investment, and saving, selected years, 1965 to 1987(percentage of GDP)

149

Country group and indicator 1965 1973 1980 1984 1985 1986 1987a

Low- and middle-income economiesConsumption 79.7 76.3 74.7 75.9 75.6 76.1 75.8

Investment 20.8 23.4 26.8 23.4 24.1 24.0 24.3Saving 18.6 22.1 23.6 21.3 21.6 21.3 23.1

Low-income economiesConsumption 81.3 76.5 75.5 77.4 76.6 76.3 74.1

Investment 19.8 23.3 25.2 23.8 26.9 27.1 27.7

Saving 18.3 22.7 23.6 21.5 22.3 22.5 25.4

Middle-income economiesConsumption 78.5 76.2 74.3 75.2 75.2 76.1 76.8Investment 21.4 23.4 27.6 23.2 22.7 22.6 23.1

Saving 18.7 21.7 23.6 21.1 21.2 20.8 21.9

Sub-Saha ran AfricaConsumption 85.2 80.4 78.5 88.7 87.3 88.9 86.2

Investment 14.4 18.6 20.8 11.5 12.4 14.5 16.4

Saving 12.6 15.5 18.3 7.8 9.0 7.2 9.4

East AsiaConsumption 77.0 71.4 71.1 69.6 69.2 67.4 65.1

Investment 22.8 27.7 29.5 28.9 31.0 29.8 29.9Saving 23.0 28.3 27.8 29.0 29.3 31.3 33.7

South AsiaConsumption 85.0 82.9 82.2 82.2 81.0 81.1 80.8Investment 17.9 17.7 23.1 22.0 23.9 22.6 22.4

Saving 14.4 16.6 17.9 17.2 18.4 18.1 20.3

Europe, Middle East, and NorthAfrica1'

Consumption 78.2 74.2 72.6 75.4 75.5 77.2 80.6Investment 22.3 25.1 30.5 27.9 28.1 28.6 27.5

Saving 17.6 26.0 26.0 22.0 21.8 20.3

I.atin America and the CaribbeanConsumption 78.5 78.8 77.2 78.2 77.9 80.2 80.4Investment 20.3 21.2 24.2 16.7 17.5 17.4 18.2

Saving 19.1 19.0 20.3 16.3 16.9 15.2 16.2

17 highly indebted countriesConsumption 77.9 78.3 75.4 78.7 77.8 79.0 78.7Investment 21.0 21.4 25.3 16.6 17.6 18.6 19.4

Saving 19.9 19.5 22.1 16.3 17.5 16.8

High-income economiesConsumption 79.5 75.0 77.1 78.9 79.8 79.3 78.9

Investment 19.9 24.0 22.2 20.8 19.9 20.2 20.8

Saving 20.8 25.4 23.5 21.4 20.4 20.9 21.2

OECD membersConsumption 79.6 75.2 77.9 79.2 80.0 79.3 79.0

Investment 19.8 24.0 22.2 20.6 19.7 20.1 20.7Saving 20.8 25.4 22.6 21.2 20.3 20.9 21.1

Total reporting economiesConsumption 79.6 75.3 76.5 78.2 78.9 78.7 78.4

Investment 20.1 24.0 23.3 21.4 20.8 20.9 21.5

Saving 20.4 24.8 23.5 21.3 20.7 21.0 21.5

Oil exportersConsumption 76.6 70.9 63.8 72.0 73.5 77.8 76.8

Investment 19.9 22.4 25.7 24.3 24.0 24.7 24.1

Saving 18.2 24.3 34.7 24.6 23.7 19.8 22.2

a. Preliminary.b. Figures after 1980 exclude Iran and Iraq.

Estimated.Projected.

150

Table A.8 Growth of export volume, 1965 to 1988

Average annual change in export volume (percent)

Country group and commodity 1965-73 1973-80 1980-85 1986 1987 1988"

By commodityLow-andmiddle-incomeeconomies 5.2 3.8 4.4 5.6 6.6 7.1

Manufactures 11.6 12.8 9.7 8.5 16.3 9.7Food 2.4 4.2 3.6 0.0 5.2 1.3Nonfood 2.1 0.4 1.2 5.6 -1.5 4.9Metals and minerals 4.8 6.5 0.1 7.0 9.2 -2.1Fuels 5.5 -0.4 1.0 5.4 -5.4 10.7

Totalreportingeconomies 8.7 4.6 2.4 4.9 5.9 8.5Manufactures 10.7 6.1 4.5 2.3 7.2 8.1Food 4.6 6.8 1.9 11.6 12.3 6.2Nonfood 3.1 0.9 2.1 0.6 14.5 6.4Metalsandminerals 6.8 8.6 0.4 6.1 0.7 3.5Fuels 8.6 0.5 -3.9 12.5 -4.3 6.2

By country groupLow-andmiddle-incomeeconomies 5.2 3.8 4.4 5.6 6.6 7.1

Manufactures 11.6 12.8 9.7 8.5 16.3 9.7Primary goods 4.3 1.2 1.5 3.6 -0.3 5.7

Low-income economies 9.6 2.3 1.5 7.0 4.3 6.8Manufactures 1.8 8.5 10.0 15.9 23.3 10.8Primary goods 11.2 1.1 -1.1 3.4 -4.0 4.6

Middle-income economies 3.9 4.4 5.3 5.2 7.3 7.2Manufactures 16.8 13.8 9.7 7.1 14.8 9.5Primary goods 2.4 1.2 2.5 3.7 1.2 6.1

Sub-Saharan Africa 15.1 0.2 -3.3 1.1 -3.3 4.3Manufactures 7.6 5.6 4.4 1.3 4.8 5.1Primary goods 15.4 -0.0 -3.7 1.1 -3.5 3.5

East Asia 9.7 8.7 9.1 14.4 13.4 9.3Manufactures 17.5 15.5 13.2 19.3 23.8 11.2Primary goods 7.3 4.7 4.8 8.1 -1.0 5.9

South Asia -0.7 5.8 3.6 8.9 10.2 7.1Manufactures 0.6 8.2 2.6 10.4 15.7 13.2Primary goods -1.8 3.1 4.9 7.3 3.9 -0.7

Europe, Middle East, andNorth AfricaManufacturesPrimary goods

LatinAmericaandtheCaribbean -1.0 0.9 4.5 -4.2 4.0 8.3Manufactures 16.6 10.1 10.2 -10.6 5.5 14.5Primary goods -1.8 -0.5 3.0 -2.3 3.6 6.5

l7highlyindebtedcountries 3,0 1.2 2.4 -3.7 2.0 7.3Manufactures 13.4 10.2 7.8 -8.6 5.5 13.5Primary goods 2.3 -0.3 0.9 -1.9 0.8 5.2

High-income economies 9.9 4.8 1.8 4.8 5.9 8.8Manufactures 10.6 5.5 3.8 1.3 5.7 7.1Primary goods 8.9 3.5 -2.5 13.6 6.3 13.6

OECD members 9.4 5.4 3.3 3.6 6.4 7.8Manufactures 10.6 5.2 3.7 1.4 4.9 6.1Primary goods 6.7 5.9 2.2 10.2 10.6 13.6

Oil exporters 8.7 0.0 -7.0 13.5 -5.2 10.5Manufactures 11.7 3.9 9.9 8.8 15.1 11.0Primary goods 8.6 -0.1 -8.2 14.0 -7.4 10.0

Table A.9 Change in export prices and terms of trade, 1965 to 1988

151

(average annual percentage change)

Country group 1965-73 1973 -80 1980-85 1986 1987 1988b

Export pricesLow- and middle-income economies 6.1 14.8 -4.3 -8.3 11.5 4.8

Manufactures 6.4 8.2 -3.7 9.4 10.3 .8.7

Food 5.9 8.6 -4.1 7.2 -7.4 .16.1

Nonfood 4.6 10.2 -4.9 0.0 21.1 2.5Metals and minerals 2.5 4.7 -4.5 -4.8 13.3 22.7Fuels 8.0 26.2 -4.1 -46.7 22.9 -17.4

High-income OECD membersTotal 4.8 10.3 -3.1 12.0 10.9 6.8Manufactures 4.6 10.8 -2.8 19.6 13.4 8.4

Terms of tradeLow- and middle-income economies 0.1 2.6 -2.0 -9.3 1.3 1.0

Low-income economies -4.8 4.0 -1.1 -16.8 4.2 -1.6Middle-income economies 1.7 2.1 -2.4 -6.7 0.3 1.7

Sub-Saharan Africa -8.5 5.0 -2.3 -23.2 3.3 -5.3East Asia -0.6 1.2 -0.6 -7.0 1.4 1.8South Asia 3.7 -3.4 1.7 2.8 -2.1 5.2Europe, Middle East, and North Africa .. .. .. .. ..LatinAmericaandtheCaribbean 3.9 2.4 -1.9 -14.0 -2.1 -0.4l7highlyindebtedcountries 1.4 3.5 -1.3 -13.7 -0.7 -0.8

High-income economies -1.2 -2.0 -0.4 8.7 -0.1 0.2OECD members -1.0 -3.3 -0.2 12.4 -0.2 0.7

Oil exporters 0.3 9.6 -2.2 -47.5 16.7 -17.3

a. Estimated.b. Projected.

Table A.10 Growth of long-term debt of low- and middle-income economies, 1970 to 1988

152

(average annual percentage change, nominal)

Country group 1970-73 1973-80 1980-85 1986 1987 1988

Low- and middle-income economiesDebt outstanding and disbursed 17.9 22.0 14.5 12.8 11.6 1.5

Official 15.1 17.9 14.6 20.1 20.4 6.2Private 20.7 25.2 14.4 8.3 5.7 -2.3

Low-income economiesDebt outstanding and disbursed 16.9 17.1 13.0 21.8 21.7 6.2

Official 15.0 14.8 11.5 23.6 23.1 8.3Private 26.1 24.9 16.9 18.1 18.8 1.4

Middle-income economiesDebt outstanding and disbursed 18.4 23.7 14.9 10.6 8.9 0.1

Official 15.3 20.5 16.7 18.2 18.9 5.0Private 20.0 25.2 14.1 7.2 4.0 -2.8

Sub-Saha ran AfricaDebt outstanding and disbursed 20.9 25.3 12.6 22.5 20.5 4.7

Official 17.2 22.9 13.7 29.7 27.7 4.4Private 25.5 29.0 10.5 11.6 7.9 5.3

East AsiaDebt outstanding and disbursed 23.6 22.4 17.7 17.7 11.2 0.2

Official 27.1 18.5 15.8 21.7 24.1 7.4Private 20.7 25.5 19.0 15.3 3.1 -5.2

South AsiaDebt outstanding and disbursed 11.7 11.2 10.8 14.3 16.7 4.9

Official 12.4 11.2 8.3 16.4 15.3 7.6Private 1.8 11.6 36.1 4.4 24.6 -8.3

Europe, Middle East, and North AfricaDebt outstanding and disbursed 21.6 28.5 15.9 12.3 13.5 1.9

Official 15.2 25.2 18.3 13.6 14.3 7.5Private 30.0 31.7 13.9 11.0 12.8 -3.9

Latin America and the CaribbeanDebtoutstandinganddisbursed 16.8 21.2 14.2 8.8 7.5 0.2

Official 11.8 15.0 15.5 24.2 23.9 4.4Private 18.8 23.1 13.9 5.1 3.0 -1.4

17 highly indebted countriesDebt outstanding and disbursed 17.4 21.8 13.6 11.4 8.8 1.0

Official 13.3 15.4 14.5 30.1 28.3 4.9Private 19.1 23.8 13.4 6.7 2.8 -0.7

Table A.11 Investment, saving, and financing requirement, 1965 to 1987

Note: An asterisk indicates a highly indebted country.

153

(percentage of GNP)

Gross domestic investment Gross national savingBalance of payments:total to be financed

Country 1965-73 1973-80 1980-87 1965-73 1973 -80 1980-87 1965-73 1973 -80 1980-87

Latin America and the Caribbean*Argentina 19.7 23.4 14.4 20.4 22.6 9.5 0.7 -0.8 -4.9

25.4 24.7 8.3 21.3 18.3 -1.6 -4.1 -6.4 -9.9*Brazil 21.3 23.9 19.7 19.1 19.3 17.0 -2.1 -4.6 -2.8*Chile 14.3 17.3 17.4 11.9 12.1 7.7 -2.4 -5.2 -9.8*Colombia 18.9 18.8 19.9 15.8 19.0 16.0 -3.2 0.2 -3.8*Costa Rica 21.8 25.5 25.4 13.0 13.8 15.0 -8.8 -11.7 -10.4*Ecuador 19.0 26.7 23.3 12.7 21.2 17.5 -6.2 -5.6 -5.8Guatemala 13.3 18.7 13.4 11.6 16.4 9.5 -1.7 -2.3 -3.9

*Jamaica 32.0 20.2 22.8 23.7 13.6 11.2 -8.4 -6.6 -11.6*Me,(jco 20.6 24.2 23.4 14.9 20.5 22.1 -5.7 -3.7 -1.3*Pe 24.1 23.9 27.0 20.9 19.7 23.0 -3.2 -4.2 -4.1*Uruguay 12.0 15.7 12.8 12.0 11.3 9.7 -0.0 -4.4 -3.1*Venezuela 31.1 34.2 21.4 31.9 35.8 24.2 0.8 1.6 2.8

Sub-Saha ran AfricaCameroon 16.6 21.8 22.4 16.9 18.2 -4.9 -4.1

*CôtedIvofre 22.8 29.1 19.9 .. 16.8 9.9 . . -12.3 -10.0Ethiopia 12.8 9.5 11.7 11.0 6.9 4.9 -1.8 -2.6 -6.8Ghana 12.3 8.7 7.1 8.7 . . 2.0 -3.5 -1.8 -5.1Kenya 22.6 26.2 25.1 17.2 16.4 18.3 -5.5 -9.8 -6.8Liberia 19.1 28.7 15.0 27.5 7.7 -1.2 -7.3Malawi 20.0 29.7 19.0 10.7 7.0 -19.0 -12.0Niger 9.7 23.8 17.2 . . 9.7 2.7 . . -14.1 -14.6

*Nigeria 16.3 22.8 14.5 11.8 24.4 12.8 -4.5 1.6 -1.8Senegal 14.7 17.5 15.5 4.2 -2.8 . . -13.3 -18.3Sierra Leone 13.8 14.1 13.7 9.8 -1.0 5.3 -4.0 -15.1 -8.4Sudan 11.9 16.2 16.0 11.0 9.6 4.2 -0.9 -6.6 -11.9Tanzania 19.9 23.9 18.7 17.1 13.6 9.0 -2.8 -10.3 -9.7Zaire 13.7 15.0 14.3 16.9 8.6 4.9 3.2 -6.4 -9.4Zambia 31.9 28.5 18.4 34.3 19.9 4.9 2.4 -8.6 -13.5

East AsiaIndonesia 15.8 24.5 28.0 13.7 24.6 24.9 -2.1 0.1 -3.2Korea, Republic of 23.9 31.0 30.4 17.6 25.7 30.0 -6.3 -5.3 -0.4Malaysia 22.3 28.7 32.9 22.6 29.4 28.1 0.2 0.6 -4.7PapuaNewGuinea 27.8 22.0 27.6 .. 11.1 3.5 .. -11.0 -24.0

*Philippines 20.6 29.1 22.7 19.7 24.3 18.2 -1.0 -4.8 -4.5Thailand 24.3 26.9 25.2 22.1 21.9 20.7 -2.1 -5.0 -4.4

South AsiaIndia 18.4 22.5 24.5 16.9 22.2 22.8 -1.5 -0.3 -1.7Pakistan 16.1 17.5 17.5 11.6 13.7 . . -5.9 -3.8Sri Lanka 15.8 20.6 27.3 11.2 13.4 16.2 -4.6 -7.2 -11.0

Europe, Middle East, and North AfricaAlgeria 32.1 44.5 35.8 31.7 38.9 35.4 -0.4 -5.6 -0.4Egypt, Arab Republic of 14.0 29.3 28.4 9.3 18.1 16.2 -4.7 -11.2 -12.2

*Morocco 15.0 25.6 22.7 13.6 16.4 14.7 -1.4 -9.1 -7.9Portugal 26.6 29.7 29.4 25.8 . . . . -3.6Tunisia 23.3 29.9 29.1 17.8 23.6 22.1 -5.5 -6.3 -7.1Turkey 18.5 21.8 22.7 16.0 18.1 19.3 -2.5 -3.7 -3.3

*Yugoslavia 29.9 35.6 38.9 27.2 32.9 38.9 -2.6 -2.7 -0.1

Table A.12 Composition of debt outstanding, 1970 to 1987

Note: An asterisk indicates a highly indebted country.

154

(percentage of total long-term debt)

Debt from official sources Debt from private sources Debt at floating rate

Country 1970-72 1980-82 1987 1970-72 1980-82 1987 1973-75 1980-82 1987

Latin America and the Caribbean*Argentifla 12.6 9.0 14.2 87.4 91.0 85.8 6.6 29.2 79.3*Bolivia 58.2 50.3 73.3 41.8 49.7 26.7 7.4 28.0 27.9*Bril 30.7 12.6 24.1 69.3 88.3 76.2 26.1 46.1 58.3*Chile 47.0 11.0 22.0 53.0 89.0 78.0 8.3 23.4 68.2*Colombia 68.2 46.1 53.8 31.8 53.9 46.2 5.4 33.7 36.8

39.8 36.8 51.0 60.2 63.2 49.0 15.6 42.4 49.8*Ecuador 51.8 30.6 34.9 48.2 69.4 65.1 8.2 36.5 68.6Guatemala 47.5 71.0 66.0 52.5 29.0 34.0 3.5 5.6 29.4

*Jamaica 7.4 68.3 82.3 92.6 31.7 17.7 4.6 17.4 24.9*Mexico 19.5 10.9 16.4 80.5 89.1 83.6 32.0 61.7 67.6*pel_u 15.5 39.3 46.0 84.5 60.7 54.0 16.1 23.0 29.9*Uguay 44.2 21.1 20.3 55.8 78.9 79.7 10.1 28.5 65.0*Venezuela 29.9 3.0 3.4 70.1 97.0 96.6 17.1 60.3 68.7

Sub-Saha ran AfricaCameroon 82.2 57.2 67.5 17.7 42.8 32.5 1.8 11.1 5.0

*Côte d'Ivoire 51.4 23.8 40.4 48.6 76.2 59.6 19.3 37.1 37.1Ethiopia 87.3 91.2 83.3 12.7 8.8 16.7 1.5 2.1 5.8Ghana 56.6 88.5 86.5 43.4 11.5 13.5 0.0 0.0 5.6Kenya 58.3 55.9 74.4 41.7 44.1 25.6 2.1 10.0 3.6Liberia 81.1 75.3 82.9 18.9 24.7 17.1 0.0 15.6 10.7Malawi 85.9 73.0 95.8 14.1 27.0 4.2 2.3 21.1 2.7Niger 96.9 42.3 67.9 3.0 57.7 32.1 0.0 13.1 9.2

*Nigeria 68.8 14.6 44.6 31.2 85.4 55.4 0.7 48.6 48.8Senegal 59.2 69.5 90.3 40.8 30.5 9.7 24.7 8.5 4.1Sierra Leone 60.6 68.2 83.0 39.4 31.8 17.0 3.8 0.1 0.6Sudan 86.1 74.4 75.2 13.9 25.6 24.8 2.2 9.7 1.0Tanzania 63.6 75.9 89.2 36.4 24.1 10.8 0.4 0.3 2.5Zaire 42.5 66.9 84.7 57.5 33.1 15.3 32.8 11.5 5.3Zambia 21.8 70.2 86.0 78.2 29.8 14.0 20.7 10.0 14.7

East AsiaIndonesia 72.1 51.8 54.9 27.9 48.2 45.1 4.9 15.0 23.9Korea, Republic of 35.2 34.3 38.1 64.8 65.7 61.9 11.9 29.0 24.4Malaysia 51.0 22.1 21.0 49.0 77.9 79.0 17.4 36.1 43.7Papua New Guinea 6.2 25.6 31.4 93.8 74.4 68.6 0.0 23.5 18.0

*philippines 22.6 32.6 43.8 77.4 67.4 56.2 7.2 23.4 45.2Thailand 40.1 40.4 50.4 59.9 59.6 49.6 0.4 21.9 26.1

South AsiaIndia 95.1 91.1 75.5 4.9 8.9 24.5 0.0 3.3 12.0Pakistan 90.6 92.8 94.6 9.4 7.2 5.4 0.0 3.1 5.4Sri Lanka 81.6 80.9 80.2 18.4 19.1 19.8 0.0 12.1 6.0

Europe, Middle East, and North AfricaAlgeria 45.9 18.9 17.0 54.1 81.1 83.0 34.0 24.2 33.0Egypt, Arab Republic of 66.9 82.1 79.7 33.1 17.9 20.3 3.1 2.5 1.9

*Morocco 79.2 56.5 71.9 20.8 43.5 28.1 2.7 26.8 30.5Portugal 29.3 24.7 17.9 70.7 75.3 82.1 0.0 33.9 41.1Tunisia 71.8 60.7 68.9 28.2 39.3 31.1 0.0 13.4 16.2Turkey 92.4 63.1 58.0 7.6 36.9 42.0 0.8 23.1 30.9

*Yugoslavia 37.5 23.6 35.1 62.5 76.4 64.9 3.2 10.1 39.2

( I World Development Indicators

ContentsKey 157Introduction and maps 158Tables

1 Basic indicators 164

Production2 Growth of production 1663 Structure of production 1684 Agriculture and food 1705 Commercial energy 1726 Structure of manufacturing 1747 Manufacturing earnings and output 176

Domestic absorption8 Growth of consumption and investment 1789 Structure of demand 180

10 Structure of consumption 182Fiscal and monetary accounts

11 Central government expenditure 18412 Central government current revenue 18613 Money and interest rates 188

Trade and balance of payments14 Growth of merchandise trade 19015 Structure of merchandise imports 19216 Structure of merchandise exports 19417 OECD imports of manufactured goods: origin and composition 19618 Balance of payments and reserves 198

External finance19 Official development assistance from OECD and OPEC members 20020 Official development assistance: receipts 20221 Total external debt 20422 Flow of public and private external capital 20623 Total external public and private debt and debt service ratios 20824 External public debt and debt service ratios 21025 Terms of external public borrowing 212

Human resources26 Population growth and projections 21427 Demography and fertility 21628 Health and nutrition 21829 Education 22030 Income distribution and ICP estimates of GDP 22231 Urbanization 22432 Women in development 226

Technical notes 228Box A.1 Basic indicators for economies with populations of less than 1 million 230Box A .2 Selected indicators for nonreporting nonmember economies 232

Bibliography 248Country classifications: World Development Report 1988 and selected international organizations 250

156

Key

In each table, economies are listed in theirgroup in ascending order of GNP per cap-ita except for those for which no GNP percapita can be calculated. These are itali-cized, in alphabetical order, at the end oftheir group. The reference numbers belowreflect the order in the tables.

Figures in the colored bands are summarymeasures for groups of economies. Theletter w after a summary measure indicatesthat it is a weighted average; m, a medianvalue; t, a total.

All growth rates are in real terms.

Data cutoff date is April 30, 1989.

= not available.0 and 0.0 = zero or less than half the unitshown.Blank means not applicable.

Figures in italics are for years or periodsother than those specified.

Note: For economies with populations of less than 1 million, see Box Al; for nonreporting nonmember economies, see Box A.2.

157

AfghanistanAlgeria

3884

HondurasHong Kong

53102

PanamaPapua New Guinea

8150

Argentina 82 Hungary 80 Paraguay 61

Australia 105 India 21 Peru 68

Austria 108 Indonesia 36 Philippines 46

Bangladesh 5 Iran, Islamic Republic of 93 Poland 76

Belgium 106 Iraq 94 Portugal 87

Benin 24 Ireland 97 Romania 95

Bhutan 2 Israel 99 Rwanda 22

Bolivia 44 Italy 103 Saudi Arabia 98

Botswana 63 Jamaica 58 Senegal 43

Brazil 78 Japan 116 Sierra Leone 23

Burkina Faso 11 Jordan 70 Singapore 101

Burma 39 Kampuchea, Democratic 41 Somalia 19

Burundi 14 Kenya 26 South Africa 75

Cameroon 60 Korea, Republic of 85 Spain 96

Canada 114 Kuwait 112 Sri Lanka 33

Central African Republic 25 Lao People's Democratic Republic 8 Sudan 27

Chad 3 Lebanon 77 Sweden 115

Chile 67 Lesotho 30 Switzerland 120

China 18 Liberia 37 Syrian Arab Republic 72

Colombia 66 Libya 91 Tanzania 10

Congo, People's Republic of the 57 Madagascar 12 Thailand 55

Costa Rica 71 Malawi 6 Togo 20

Côte d'Ivoire 52 Malaysia 73 Trinidad and Tobago 90

Denmark 113 Mali 13 Tunisia 64

Dominican Republic 51 Mauritania 35 Turkey 65

Ecuador 62 Mauritius 69 Uganda 17

Egypt, Arab Republic ofEl Salvador

4956

MexicoMorocco

7448

United Arab EmiratesUnited Kingdom

117104

Ethiopia 1 Mozambique 9 United States 119

Finland 111 Nepal 7 Uruguay 79

France 109 Netherlands 107 Venezuela 88

Gabon 86 New Zealand 100 Viet Nam 42

Germany, Federal Republic of 110 Nicaragua 54 Yemen Arab Republic 47

Ghana 32 Niger 16 Yemen, People's DemocraticGreece 89 Nigeria 31 Republic of 34

Guatemala 59 Norway 118 Yugoslavia 83

Guinea 40 Oman 92 Zaire 4

Haiti 29 Pakistan 28 Zambia 15Zimbabwe 45

Introduction

The World Development Indicators provide infor-mation on the main features of social and eco-nomic development. Most of the data collected bythe World Bank are on the low- and middle-incomeeconomies. Because comparable data for high-income economies are readily available, these arealso included here. Additional information onsome of these and other countries may be found inother World Bank publications, notably the Atlas,World Tables, World Debt Tables, and Social Indicatorsof Development. Data available for nonreportingnonmembers are summarized in the main tablesand shown by country in Box A.2 of the technicalnotes.

This edition presents revised country classifica-tions and new regional groupings. In these notesthe term "country" does not imply political inde-pendence, but may refer to any territory whoseauthorities present for it separate social or eco-nomic statistics. As in the past, the Bank classifieseconomies for certain operational and analyticalpurposes according to GNP per capita, and in thisedition some new groups are shown, others havebeen dropped, and some have been renamed. Seethe definitions and data notes at the beginning ofthe main report for a detailed description of thecountry groupings.

Every effort has been made to standardize thedata. However, full comparability cannot be en-

158

sured, and care must be taken in interpreting theindicators. The statistics are drawn from sourcesthought to be most authoritative, but many ofthem are subject to considerable margins of error.Variations in national statistical practices also re-duce the comparability of data which should thusbe construed only as indicating trends and charac-terizing maj or differences among economies,rather than taken as precise quantitative indica-tions of those differences.

The indicators in Table I give a summary profileof economies. Data in the other tables, rearrangedthis year, fall into the following broad areas: pro-duction, domestic absorption, fiscal and monetaryaccounts, trade and balance of payments, externalfinance, and human resources.

Two tables have been suspended from this edi-tion, one added, and two more modified. The tableon labor force has been dropped since updates de-pend on population census data that are usuallycollected only every five or ten years. The tradetable on origin and destination of manufacturedexports has now been replaced with Table 17,OECD imports of manufactured goods: origin andcomposition. Table 18, Balance of payments andreserves, now shows receipts of workers' remit-tances on a net basis rather than credits only,which was the practice in the past. Table 30, In-come distribution and ICP estimates of GDP, as the

name indicates, now includes International Com-parison Program (ICP) data on GDP comparisons.See the technical notes for details on thesechanges.

Data on external debt are compiled directly bythe Bank on the basis of reports from developingmember countries through the Debtor ReportingSystem. Other data are drawn mainly from theUnited Nations and its specialized agencies andthe International Monetary Fund (IMF); countryreports to the World Bank and Bank staff estimatesare also used to improve currentness or consis-tency. For most countries, national accounts esti-mates are obtained from member governments byWorld Bank staff on economic missions and are, insome instances, adjusted by Bank staff to conformto international definitions and concepts to pro-vide better consistency.

For ease of reference, ratios and rates of growthare shown; absolute values are reported in only afew instances in the World Development Indica-tors but are usually available from other WorldBank publications, notably the recently released1988-89 edition of the World Tables. Most growthrates are calculated for two periods, 1965-80 and1980-87, and are computed, unless noted other-wise, by using the least-squares regressionmethod. Because this method takes all observa-tions in a period into account, the resulting growthrates reflect general trends that are not unduly in-fluenced by exceptional values, particularly at theend points. To exclude the effects of inflation, con-stant price economic indicators are used in calcu-lating growth rates. Details of this methodologyare given at the beginning of the technical notes.Data in italics indicate that they are for years orperiods other than those specifiedup to two

years earlier for economic indicators and up tothree years on either side for social indicators,since the latter tend to be collected less regularlybut change less dramatically over short periods oftime. All dollar figures are U.S. dollars. The vari-ous methods used for converting from nationalcurrency figures are described, where appropriate,in the technical notes.

Differences between figures in this year's andlast year's edition reflect not only updating revi-sions to the countries themselves, but also re-visions to historical series and changes in meth-odology. In addition, the Bank also reviewsmethodologies in an effort to improve the interna-tional comparability and analytical significance ofthe indicators, as explained in the technical notes.

As in the World Development Report itself, themain criterion used to classify economies in theWorld Development Indicators is GNP per capita.These income groupings are analytically useful fordistinguishing economies at different stages of de-velopment. Many of the economies are furtherclassified by geographical location. Other classifi-cations include 17 highly indebted countries andall oil exporters. The major classifications used inthe tables this year are 42 low-income economieswith per capita incomes of $480 or less in 1987, 53middle-income economies with per capita incomesof $481-$5,999, and 25 high-income economies.For a final group of 10 nonreporting nonmembereconomies, paucity of data, differences in methodfor computing national income, and difficulties ofconversion are such that only aggregates, whereavailable, are shown in the main tables. Country-specific data for selected indicators for these coun-tries, however, are included in Box A.2 in the tech-nical notes.

159

Economies with populations of less than I mil-lion are not shown separately in the main tables,but basic indicators for these countries and territo-ries are in a separate table in Box A.1.

The summary measures are overall estimates:countries for which individual estimates are notshown, because of size, nonreporting, or insuffi-cient history, have been included by assumingthey follow the trend of reporting countries duringsuch periods. This gives a more consistent aggre-gate measure by standardizing country coveragefor each period shown. Group aggregates includecountries with less than 1 million population, eventhough country-specific data for these countries donot appear in the tables. Where missing informa-tion accounts for a significant share of the overallestimate, however, the group measure is reportedas not available.

160

Groups of economies

Countries are colored to show their incomegroup; for example, all low-income econo-mies (those with a CNP per capita of $480 orless in 1987) are colored yellow. The groupsare those used in the 32 tables that follow.

Low-income economiesMiddle-income economiesHigh-income economies

Nonreporting nonmembers (see Box A.2)

Economies not included in the main tables(see Box Al)

Wallo and

(Fr)

UOkRao(NU)

ueRutnrn

Sarooa

Soruerroan Samoa -US)

Nue)Nl)

tonga

Throughout the World Development Indicators,the data for China do not include Taiwan, China.However, footnotes to Tables 14-18 provide esti-mates of the international transactions for Taiwan,China.

The table format of this edition follows that usedin previous years. In each group, economies arelisted in ascending order of GNP per capita, exceptthose for which no such figure can be calculated.These are italicized and in alphabetical order at theend of the group deemed to be appropriate. Thisorder is used in all tables except Table 19, whichcovers only OPEC and high-income OECD coun-tries. The alphabetical list in the key shows thereference number for each economy; here, too,italics indicate economies with no estimates ofGNP per capita. Economies in the high-incomegroup marked by the symbol are those classified

French

Polynesia

(Fr)Dominican

Rep.

Vrrgrn Macgd

(US)

Netherlanda Antilles

(held)

Puerto Rico

Venr000la

St Krnrard Mcciv

Ontigna and Barbuda

Mon toe cuat (U K)

Guadelouper (Fr)

Sonrinioc

So Marlinipoe (Fr)

SC LuoSoBarbados

Sl Vinoenlard IdeGsnnal Srnnudaoes

Trinidad cod tobago

Orgestrrra

Uropune

HAS

Coda

HondurasGualernualu

El Salvador Nicaragua

CortaRiru uoantraf

Mend

en)

by the United Nations or otherwise regarded bytheir authorities as developing. In the coloredbands are summary measurestotals, weightedaverages, or median valuescalculated for groupsof economies if data are adequate.

The methodology used for computing the sum-mary measures is described in the technical notes.For these numbers, w indicates that the summarymeasures are weighted averages; m, median val-ues; and t, totals. The coverage of economies is notuniform for all indicators, and the variation frommeasures of central tendency can be large; there-fore readers should exercise caution in comparingthe summary measures for different indicators,groups, and years or periods.

The technical notes and footnotes to tables should bereferred to in any use of the data. These notes outlinethe methods, concepts, definitions, and data

Fed Rep annSpec

GtnyprSwiderlaedPcitagta

Gidrahur UK)-a

Malta

apedende

Fanrue Islands FinlandF (Den) Normay

Smeder

ISlesMaeCd Genrrraik _-GhneFafl Seem Rep

IrMeeG N PolandCuechonlnnayra

CRunneIlnluedK

ItulMMGaPP

AiQerra

oud Mn a

an Gambia hurNnu

Guinha-BisnuSGuinea

Rosa

Srerra Shone Clan Ghana

Liberia

Jobs

Equalsnal GainekGun Tame and Prinuipe

NiGeria

Ta ICed

LaGab

Isiamindep:LdTi

LiGyaAR

nrunruri Kira

Cenlral

CamennonAtriran Any

Sudan

Ethiopia

J n1L- UGandaPenpiec Kenya

I Sedan Rep

TI An Amandu

Cnngo Zaire Karachi /K Tannanra

Sesuilund

Leanths

Saudi Qatar UArabia UmledArab

F t

helene Peuplad Seer Anye)hecnnn

D)iboati

Sum

Cumorus

MabaQusn

UmndlaPoeadSseralouReWdeloa

Seychelles

Alphaniutan

Maurilius

Ananiun (Fr)

Pakinlan

Maid nec

Nepal heutan

Beep lade a)L

InMa \ aamno

Sd Lanka

China

sources used in compiling the tables. The bibliog-raphy gives details of the data sources, which con-tain comprehensive definitions and descriptions ofconcepts used. It should also be noted that countrynotes to the World Tables provide additional expla-nations of sources used, breaks in comparability,and other exceptions to standard statistical prac-tices that have been identified by Bank staff onnational accounts and international transactions.

Comments and questions relating to the WorldDevelopment Indicators should be addressed to:

Socio-Economic Data DivisionInternational Economics DepartmentThe World Bank1818 H Street, N.W.Washington, D.C. 20433.

Hnnp Along (UK)

Macas (Purl)

lUn PeupidsAnne Aep

Aol horn

Panes

Uapep

Philippr anNGuam (US)

TraM Territnry Pt the

PoMtiu Islands

(US)

Papua

U. Nen GuieeP

Nens Zealand

Vaeaala°-

Krrlbali

Solomona. lulonbu Taualu -

hue Culedseia(Pt)

161

6

4

2

0

162

Population

0-15 million

15-50 million

50-100 million

100 + million

Data not available

Fertility and mortality

Total fertility

Births per woman8

Low-income economies- Middle-income economies

The colors on the map show the generalsize of a country's population. For ex-ample, countries with a population ofless than 15 million are colored yellow.Note that Table 1 gives the populationfor each of the 120 countries in the main

Infant mortality

Deaths per 1,000 live births

Note: For explanations of terms or methods, see the technical notes for Tables 27 and 32.

tables; the technical note to that tablegives data for an additional 55 reportingeconomies in Box A.1, and 10 nonre-porting nonmember economies in BoxA .2.

Life expectancy

Years

1965 1987 2000 1965 1975 1987 1965 1970 1975 1980

High-income economies

Nonreporting nonmember economies

1987

150 80

100

60

50

40

0 0

Share of agriculture in GDP

1

23

456

7

Percentageof GDP

1

0-9 percent10-19 percent

20-39 percent

40 + percent

Data not available

The value added by a country's agricul-tural sector divided by the gross domes-tic product gives the share of agriculturein GDP. The map classifies countries bythose shares. For example, countrieswhose shares of agriculture in GDPrange from 0 to 9 percent are coloredyellow. The shares say nothing about

External balances of low- and middle-income countries

- - - - Current account balance Current account balance(after official transfers) (before official transfers)

Note: For explanations of terms or methods, see the technical notes for Table 18.

The current account balance (on goods, services, income, and all unrequited transfers)represents transactions that add to or subtract from an economy's stock of foreign financialitems. For some purposes, however, official unrequited transfers (mainly foreign aid grants,food aid, and technical assistance) are treated as being closely akin to official capital move-ments. A measure of the current account balance before official transfers, sometimes re-ferred to as "total to be financed," is then appropriate. For further information, see thetechnical note for Table 18 but note that the table reports dollar values for each measure in1970 and 1987, whereas the chart traces period averages relative to GDP throughout theperiod.

Sub-SaharanAfrica

1970-79 1980-83 1984-87

absolute values of production. Forcountries with high levels of subsistencefarming, the share of agriculture in GDPis difficult to measure due to difficultiesin assigning subsistence farming its ap-propriate value. For more details, seethe technical note for Table 3.

[_- 1 Financed by net official transfers

163

Low-income Middle-income Highly indebtedeconomies economies economies

1970-79 1980-83 1984-87 1970-79 1980-83 1984-87 1970-79 1980-83 1984-87

Table 1. Basic indicators

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

164

Population(millions)

Area(thousandsof square

GNP per capil&Average annualrate of inflation

(percent)

Lifeexpectancy

at birth(years)Dollars

Average annualgrowth rate

(percent)mid-1987 kilometers) 1987 196.5-87 1965-80 1980-87 1987

Low-income economies 2,822.9 t 37,015 290w 3.1 w 8.9w 8.6w 61 wChina and India 1,866.lt 12,8491 300w 3.9w 2.9w 5.5w 65 wOther low-income 956.9t 24,166t 280w 1.5w 18.2 w 13.3 w 54 w

1 Ethiopia 44.8 1,222 130 0.1 3.4 2.6 472 Bhutan 1.3 47 150 . . . . . . 483 Chad 5.3 1,284 150 -2.0 6.3 5.3 464 Zaire 32.6 2,345 150 -2.4 24.7 53.5 525 Bangladesh 106.1 144 160 0.3 14.9 11.1 51

6 Malawi 7.9 118 160 1.4 7.0 12.4 467 Nepal 17.6 141 160 0.5 7.8 8.8 518 LaoPDR 3.8 237 170 46.5 489 Mozambique 14.6 802 170 26.9 48

10 Tanzania 23.9 945 180 -0.4 9.9 24.9 53

11 BurkinaFaso 8.3 274 190 1.6 6.2 4.4 4712 Madagascar 10.9 587 210 -1.8 7.9 17.4 5413 Mali 7.8 1,240 210 . . . . 4.2 4714 Burundi 5.0 28 250 1.6 8.5 7.5 4915 Zambia 7.2 753 250 -2.1 6.4 28.7 5316 Niger 6.8 1,267 260 -2.2 7.5 4.1 4517 Uganda 15.7 236 260 -2.7 21.2 95.2 4818 China 1,068.5 9,561 290 5.2 0.0 4.2 6919 Somalia 5.7 638 290 0.3 10.5 37.8 4720 logo 3.2 57 290 0.0 6.9 6.6 5321 India 797.5 3,288 300 1.8 7.6 7.7 5822 Rwanda 6.4 26 300 1.6 12.4 4.5 4923 Sierra Leone 3.8 72 300 0.2 8.0 50.0 4124 Benin 4.3 113 310 0.2 7.4 8.2 5025 Central African Rep. 2.7 623 330 -0.3 8.5 7.9 5026 Kenya 22.1 583 330 1.9 7.3 10.3 5827 Sudan 23.1 2,506 330 -0.5 11.5 31.7 5028 Pakistan 102.5 796 350 2.5 10.3 7.3 5529 Haiti 6.1 28 360 0.5 7.3 7.9 5530 Lesotho 1.6 30 370 4.7 8.0 12.3 5631 Nigeria 106.6 924 370 1.1 13.7 10.1 5132 Ghana 13.6 239 390 -1.6 22.8 48.3 5433 SriLanka 16.4 66 400 3.0 9.4 11.8 7034 Yemen, PDR 2.3 333 420 . . . . 5.0 5135 Mauritania 1.9 1,031 440 -0.4 7.7 9.8 4636 Indonesia 171.4 1,905 450 4.5 34.2 8.5 6037 Liberia 2.3 111 450 -1.6 6.3 1.5 5438 Afghanistan . . 648 4.9 .

39 Burma 39.3 677 6040 Guinea 6.5 246 2.9 4241 Kampuchea,Dem. .. 181 . .

42 VietNam 65.0 330 .. 66

Middle-income economies 1,038.5 t 36,118t 1,810w 2.5 w 20.4w 62.3 w 65 wLower-middle-income 609.6 t 16,781 t 1,200w 2.2 w 16.9 w 36.7 w 64w

43 Senegal 7.0 196 520 -0.6 6.5 9.1 4844 Bolivia 6.7 1,099 580 -0.5 15.7 601.8 5345 Zimbabwe 9.0 391 580 0.9 6.4 12.4 5846 Philippines 58.4 300 590 1.7 11.7 16.7 6347 YemenArabRep. 8.5 195 590 . . 11.4 51

48 Morocco 23.3 447 610 1.8 6.1 7.3 6149 Egypt, Arab Rep. 50.1 1,002 680 3.5 7.3 9.2 6150 PapuaNewGuinea 3.7 462 700 0.8 7.5 4.4 5451 Dominican Rep. 6.7 49 730 2.3 6.8 16.3 6652 Côted'Ivoire 11.1 322 740 1.0 9.5 4.4 52

53 Honduras 4.7 112 810 0.7 5.6 4.9 6454 Nicaragua 3.5 130 830 -2.5 8.9 86.6 6355 Thailand 53.6 514 850 3.9 6.3 2.8 6456 El Salvador 4.9 21 860 -0.4 7.0 16.5 6257 Congo, People's Rep. 2.0 342 870 4.2 6.6 1.8 5958 Jamaica 2.4 11 940 -1.5 12.8 19.4 7459 Guatemala 8.4 109 950 1.2 7.1 12.7 6260 Cameroon 10.9 475 970 3.8 8.9 8.1 5661 Paraguay 3.9 407 990 3.4 9.4 21.0 6762 Ecuador 9.9 284 1,040 3.2 10.9 29.5 6563 Botswana 1.1 582 1,050 8.9 8.1 8.4 5964 Tunisia 7.6 164 1,180 3.6 6.7 8.2 6565 Turkey 52.6 781 1,210 2.6 20.7 37.4 6466 Colombia 29.5 1,139 1,240 2.7 17.4 23.7 6667 Chile 12.5 757 1,310 0.2 129.9 20.6 72

Note: For countries with populations of less than I million, see Box A. 1. t Economies classified by the United Nations or otherwise regarded by their authorities asdeveloping. a. See the technical notes. b. GNP data refer to GDP.

165

Population(millions)

Area(thousandsof square

GNPper capita'Average annualrate of inflation

(Percent)

Lifrexpectancy

at birth(years)Dollars

Average annualgrowth rate

(percent)mid-1987 kilometers) 1987 1965-87 1965 -80 1980-87 1987

68 Peru 20.2 1,285 1,470 0.2 20.5 101.5 6169 Mauritius 1.0 2 1,490 3.2 11.4 8.1 6770 Jordan 3.8 98 1,560 . . . 2.8 6671 Costa Rica 2.6 51 1,610 1.5 11.3 28.6 7472 Syrian Arab Rep. 11.2 185 1,640 3.3 8.3 11.0 65

73 Malaysia 16.5 330 1,810 4.1 4.9 1.1 7074 Mexico 81.9 1,973 1,830 2.5 13.0 68.9 6975 South Africa 33.1 1,221 1,890 0.6 10.0 13.8 6076 Poland 37.7 313 1,930 . - 29.2 7177 Lebanon 10 . . 9.3

Upper-middle-income 432.5 1 20,272 1 2,710w 2.9 w 23.2 w 86.8 w 67 w

78 Brazil 141.4 8,512 2,020 4.1 31.3 166.3 6579 Unsguay 3.0 176 2,190 1.4 57.8 54.5 7180 Hungaiy 10.6 93 2,240 3.8 2.6 5.7 7081 Panama 2.3 77 2,240 2.4 5.4 3.3 7282 Argentina 31.1 2,767 2,390 0.1 78.2 298.7 71

83 Yugoslavia 23.4 256 2,480 3.7 15.3 57.2 7184 Algeria 23.1 2,382 2,680 3.2 9.8 5.6 6385 Korea, Rep. 42.1 98 2,690 6.4 18.8 5.0 6986 Gabon 1.1 268 2,700 1.1 12.7 2.6 5287 Portugal 10.2 92 2,830 3.2 11.5 20.8 73

88 Venezuela 18.3 912 3,230 -0.9 10.4 11.4 7089 Greece 10.0 132 4,020 3.1 10.5 19.7 7690 TrinidadandTobago 1.2 5 4,210 1.3 14.0 6.2 7091 Libya 4.1 1,760 5,460 -2.3 15.4 0.1 6192 Oman 1.3 212 5,810 8.0 17.6 -6.5 55

93 Iran,IslamicRep. 47.0 1,648 15.6 6394 iraq 17.1 435 6495 Ro,nania 22.9 238 . . - . 70

Low- and middle-income 3,861.4 I 73,133 700 w 2.7 w 16.5 w 43.9w 62 wSub-Saharan Africa 441.7 20,999 330 w 0.6 w 12.3 w 15.2 w 51 wEast Asia 1,512.7 £ 14,019 470 w 5.1 w 8.8 w 5.4 w 68 wSouth Asia 1,080.9 I 5,158 290 w 1.8w 8.4 w 7.8 w 57 wEurope, M.East, & N.Africa 389.6 11,430 1,940w 2.5 w 13.1 w 23.7 w 64 wLatin America & Caribbean 403 .5 t 20,306 1,790w 2.1 w 29.3 w 109.1 w 66 w

17 highly indebted 582.5 t 21,213 t 1,430w 2.0w 26.0w 91.2 w 63w

High-income economies 777.2 t 33,757 t 14,430w 2.3 w 7.9 w 5.2 w 76wOECD members 746.6 t 31,085 t 14,670 w 2.3 w 7.6 w 5.0w 76 w

tOther 30.6 i 2,673 1 7,880 w 3.5 w 15.9 w 13.3 w 70w

96 Spain 38.8 505 6,010 2.3 12.3 10.7 7797 Ireland 3.6 70 6,120 2.0 12.0 10.2 7498 tSaudi Arabia 12.6 2,150 6,200 4.0 17.2 -2.8 6399 jIsrael 4.4 21 6,800 2.5 25.2 159.0 75

100 NewZealand 3.3 269 7,750 0.9 10.2 11.5 75

101 tSingapore 2.6 1 7,940 7.2 4.9 1.3 73102 tHong Kong 5.6 1

8,070b 62b 8.1 6.7 76103 Italy 57.4 301 10,350 2.7 11.2 11.5 77104 UnitedKingdom 56.9 245 10,420 1.7 11.2 5.7 75105 Australia 16.2 7,687 11,100 1.8 9.2 7.8 76

106 Belgium 9.9 31 11,480 2.6 6.7 5.1 75107 Netherlands 14.7 37 11,860 2.1 7.3 2.3 77108 Austria 7.6 84 11,980 3.1 5.8 4.3 74109 France 55.6 547 12,790 2.7 8.0 7.7 77110 Germany,Fed. Rep. 61.2 249 14,400 2.5 5.2 2.9 75

Ill Finland 4.9 337 14,470 3.2 10.5 7.2 76112 tKuwait 1.9 18 14,610 -4.0 16.3 -4.6 73113 Denmark 5.1 43 14,930 1.9 9.3 6.8 75114 Canada 25.9 9,976 15,160 2.7 7.1 5.0 77115 Sweden 8.4 450 15,550 1.8 8.0 7.9 77

116 Japan 122.1 378 15,760 4.2 7.8 1.4 78117 jUnited Arab Emirates 1.5 84 15,830 . . . . 0.3 71118 Norway 4.2 324 17,190 3.5 7.7 6.1 77119 United States 243.8 9,373 18,530 1.5 6.5 4.3 75120 Switzerland 6.5 41 21,330 1.4 5.3 3.9 77

Total reporting economies 4,638.6 t 106,890 £ 3,010 w 1.5 w 9.8 w 13.7 w 65 wOil exporters 578.4 t 17,303 1 1,520w 2.1 w 15.0w 20.1 w 61 w

Nonreporting nonmembers 371.5t 26,645t 69w

Table 2. Growth of production

Note: For data comparability and coverage, see the technical noteu. Figureu in italics are for years other than thoue upecified.

166

Average annual growth rate (percent)

GD!' Agriculture Industry (Manufacturing) Services, etc.

1965-80 1980-87 1965-80 1980-87 1965-80 1980-87 1965-80 1980-87 1965-80 1980-87

Low-income economies 5.4w 6.1w 2.7w 4.0w 8.7w 8.6w 8.1w 10.3w 5.7w 5.1wChina and India 5.3w 8.5w 2.9w 5.1w 8.0w 12.0w 7.9w 11.7w 5.7w 6.9wOther low-income 5.5w 1.7w 2.3w 1.9w 10.0 w 0.2 w 9.0w 3.9w 5.7w 2.9w

I Ethiopia 2.7 0.9 1.2 -2.1 3.5 3.8 5.1 3.8 5.2 3.52 Bhutan3 Chadb

. .

0.1. .

5.1 . . 2.6 ioió 8.5 6.34 Zairet' 1.3 1.6 . . 3.2 3.6 0.6 -1.25 Bangladesh" 2.4 3.8 1.5 2.4 3.8 4.7 6.8 2.4 5.2

6 Malawi 5.8 2.6 . . 2.5 1.9 3.07 Nepal 1.9 4.7 1.1 4.28 La0PDR 5.3 .. ..9 Mozambique -2.6 . . -11.] . . -8.4 . . , . . . 6.2

10 Tanzania 3.7 1.7 1.6 3.8 4.2 -2.4 5.6 -3.5 6.7 0.8

11 BurkinaFaso . . 5.6 6.1 3.9 5.812 Madagascart' 1.6 0.3 . . 2.2 . . -2.0 . . -0.513 Mali" 3.9 3.4 2.8 0.3 1.8 9.8 . . . , 7.6 5.914 Burundi 3.5 2.6 3.3 1.7 7.8 4.9 6.0 6.6 2.7 3.515 Zambia" 1.9 --0.1 2.2 3.2 2.1 -0.7 5.3 0.8 1.5 -0.616 Nigert' 0.3 -1.9 -3.4 2.8 11.4 -4.3 . . . . 3.4 -8.017 Uganda 0.8 0.4 1.2 -0.5 -4.1 1.4 -3.7 -0.9 1.1 3.018 China 6.4 10.4 3.0 7.4 10.0 13.2 9,5c ]2.6c 7.0 7.619 Somalia 3.3 2.2 . . 2.8 . . 1.0 . . -0.5 . . 0.920 Togob 4.5 -0.5 1.9 0.8 6.8 -1.6 5.4 -0.7

21 India 3.7 4.6 2.8 0.8 4.0 7.2 4.3 8.3 4.6 6.122 Rwandab 5.0 2.4 . . 1.] . . 4.8 . . 2.5 . . 3.923 SierraLeone 2.6 0.7 2.3 1.6 -1.0 -2.3 4.3 0.6 5.8 1.324 Benin 2.1 2.8 . . 2.5 . . 8.3 4.6 . . 1.325 CentralAfricanRep. 2.6 2.0 2.1 2.4 5.3 2.2 0.3 2.0 1.6

26 Kenya 6.4 3.8 4.9 3.4 9.8 3.0 10.5 4.3 6.4 4.427 Sudan 3.8 -0.1 2.9 0.8 3.1 2.! . . 1.6 4.9 -1.328 Pakistan 5.1 6.6 3.3 3.4 6.4 9.1 5.7 8.9 5.9 7.129 Haitib 2.9 -0.4 . . . . . . .

30 Lesotho 5.9 2.3 0.4 0.4 . . 12.9 4.0

31 Nigeria 6.9 -1.7 1.7 0.6 13.1 -4.4 14.6 -2.1 7.6 -0.332 Ghan&' 1.4 1.4 1.6 0.0 1.4 0.1 2.5 1.3 1.1 4.233 SriLanka 4.0 4.6 2.7 3.1 4.7 4.2 3.2 6.2 4.6 5.734 Yemen, PDR" .. .. .. .. ..35 Mauritania 2.0 1.4 -2.0 1.5 2.2 5.1 6.5 -1.336 Indonesia" 8.0 3.6 4,3 3.0 11.9 2.1 12.0 7.8 7.3 5.637 Liberia 3.3 -1.3 5.5 1.2 2.2 -6.0 10.0 -5.0 2.4 -0.838 Afghanistan 2.9 .

39 Burma40 Guinea" 3.8

41 Kampuchea,Dem.42 VietNam

Middle-income economies 6.2w 2.8w 3.4w 2.5w 6.0w 2.9w 8.1w 3.0w 7.3w 3.1 wLower-middle-income 5.7w 2.1 w 3.5 w 2.3w 6.0w 1.8w 6.9w 2.1 w 6.3w 2.3 w

43 Senegal" 2.1 3.3 1.4 4.2 4.8 4.3 3.4 4.3 1.3 2.444 Bolivia" 4.5 -2.1 3.8 2.5 3.7 -6.6 5.4 -6.9 5.6 -1.145 Zimbabwe 4.4 2.4 . . 2.3 . . 1.4 . . 1.8 . . 3.346 Philippines" 5.9 -0.5 4.6 1.8 8.0 -2.8 7.5 -1.1 5.2 0.047 Yemen Arab Rep." 5.6 2.3 8.7 14.2 6.0

48 MOroccob 5.4 3.2 2.2 3.6 6.1 1.2 5.9 1.5 6.5 4.349 Egypt, Arab Rep. 6.8 6.3 2.7 2.7 6.9 5.5 6.1 9.4 8.150 PapuaNewGuinea" 4.6 3.0 3.2 2.2 . . 5.3 . . 1.0 . . 2.051 Dominican Rep." 7.3 1.6 4.6 1.0 10.9 1.0 8.9 0.4 6.7 1.352 Côted'Ivoire 6.8 2.2 3.3 1.6 10.4 -2.4 9.1 8.2 8.6 4.2

53 Honduras 5.0 1.3 2.0 1.7 6.8 1.2 7.5 1.9 6.2 1.154 Nicaragua" 2.6 -0.3 3.3 -0.2 4.2 0.4 5.2 0.6 1.4 -0.955 Thailand" 7.2 5.6 4.6 3.7 9.5 5.9 11.2 6.0 7.6 6.456 El Salvador" 4.3 -0.4 3.6 -1.6 5.3 0.0 4.6 -0.3 4.3 0.257 Congo, People's Rep.b 6.4 5.5 3.1 1.5 10.3 10.9 9.7 4.7 -1.958 Jamaica" 1.3 0.4 0.5 1.4 -0.1 -0.4 0.4 1.7 2.7 0.859 Guatemala" 5.9 -0.7 . . . . . . . . . . .. .

60 Cameroon" 5.1 7.0 4.2 2.4 7.8 11.0 7.0 8.5 4.8 6.961 Paraguayt' 6.9 1.3 4.9 2.0 9.1 -0.3 7.0 0.8 7.5 1.962 Ecuadort' 8.7 1.5 3.4 3.6 13.7 1.4 11.5 0.2 7.6 0.9

63 Botswanab 14.2 13.0 9.7 -7.8 24.0 19.2 13.5 4.5 11.5 9.564 Tunisia 6.6 3.6 5.5 4.2 7.4 2.7 9.9 6.1 6.5 4.165 Turkey 6.3 5.2 3.2 3.3 7.2 6.7 7.5 8.2 7.6 5.066 Colombia 5.6 2.9 4.3 2.1 5.5 5.2 6.2 3.2 6.4 2.067 Chile" 1.9 1.0 1.6 3.6 0.8 1.5 0.6 0.9 2.7 0.3

a. Because manufacturing is generally the most dynamic part of the industrial sector, its gmwth rate is shown separately. b. GDP and its components are at purchaservalues. c. World Bank estimate. d. Data refer to the period 1973-80.

167

Average annual growth rate (percent)

GDP Agriculture Industry (Manufacturing) Services, etc.

1965-80 1980-87 1965-80 1980-87 1965-80 1980-87 1965-80 1980-87 1965-80 1980-87

68 Peni5 3.9 1.2 1.0 3.0 4.4 0.5 3.8 1.5 4.3 1.469 Mauritius 5.6 5.5 . . 5.2 8.7 10.9 4.170 Jordan . 4.3 . . 4.1 . . 4.5 3.1 . . 4.371 CostaRicat 6.2 1.8 4.2 1.7 8.7 2.0 . . . . 6.0 1.772 SyrianArabRep.t' 8.7 0.3 4.8 -1.1 11.8 1.5 9.0 0.3

73 Malaysia" 7.4 4.5 . . 3.4 . 5.8 . . 6.3 . . 3.874 Mexico"' 6.5 0.5 3.2 1.4 7.6 -0.3 7.4 0.0 6.6 0.875 South Africa 4.1 1.0 0.3 . . -0.1 . . -0.5 2.376 Polan&' . . .

77 Lebanon" -1.2

Upper-middle-income 6.7w 3.4w 3.4w 2.6w 5.8w 3.7w 9.2w 4.1 w 8.2w 3.8w

78 Brazil 9.0 3.3 3.8 2.6 9.8 2.4 9.6 1.2 10.0 4.179 Uniguay 2.4 -1.3 1.0 0.2 3.1 -3.2 . . -1.6 2.3 -0.680 Hungary" 5.6 1.7 2.7 2.5 6.4 1.3 . . . . 6.2 1.881 Panama 5.5 2.6 2.4 2.5 5.9 -0.8 4.7 0.7 6.0 3.582 Argentina" 3.5 -0.3 1.4 1.6 3.3 -0.9 2.7 0.0 4.0 -0.3

83 Yugoslavia 6.0 1.5 3.1 1.4 7.8 1.4 . . . . 5.5 1.684 Algeriab 7.5 3.8 5.6 6.0 8.1 4.3 9.5 8.5 7.2 2.685 Korea, Rep." 9.5 8.6 3.0 4.4 16.5 10.8 18.7 10.6 9.3 7.786 Gabon" 9.5 0.6 . . .

87 Portugal 1.4 -0.9 1.0 1.4

88 Venezuela" 3.7 0.2 3.9 3.5 1.5 -0.9 5.8 3.0 6.3 0.889 Greece 5.6 1.4 2.3 -0.1 7.1 0.4 8.4 0.0 6.2 2.590 Trinidad and Tobago 5.1 -6.1 0.0 4.5 5.0 -8.6 2.6 -9.5 5.8 -3.491 Libya 4.2 . . 10.7 . . 1.2 . . 13.7 15.592 Oman" 15.2 12.7 9.4 15.1 37.9 12.2

93 !ran,IslamicRep. 6.2 4.5 2.4 10.0 13.694 Iraq95 Roenania . . . .

Low- and middle-income 5.9w 4.0w 3.0w 3.4w 6.7w 5.1 w 8.1 w 6.0w 6.9 w 3.6 wSub-Saharan Africa 5.1 w 0.4w 1.7w 1.2w 9.5w -1.2w 8.8w 0.6w 5.5w 1.2wEast Asia 7.2w 8.0w 3.3w 5.9w 10.8w 10.1 w 10.7w 10.4w 7.6w 6.4wSouth Asia 3.8w 4.8w 2.7w 1.4w 4.3w 7.2w 4.5w 8.0w 4.7w 6.1wEurope, M.East, & N.Africa 6.2w . . 3.5 w . . 5.0w . . . . . . 8.6wLatin America & Caribbean 6.0w 1.4w 3.2w 2.2w 6.0w 0.8w 6.9w 0.6w 6.7w 1.8w

17 highly indebted 6.1 w 1.1 w 2.8 w 1.8 w 6.9w 0.2 w 7.2 w 0.4w 6.7 w 1.7 w

High-income economies 3.7 w 2.6w 0.8 w 2.8 w 3.2 w 2.3 w 3.6w 3.3 w 3.7 w 2.7 wOECD members 3.6w 2.7 w 0.8 w 2.6 w 3.1 w 2.5 w 3.6 w 3.2 w 3.7 w 2.7 w

tOther 8.1 -2.6w . . 10.1w . . -8.1 w 4.8w 4.1 w

96 Spain" 4.6 2.1 2.6 0.9 5.1 0.4 5.9 0.4 4.1 2.197 Ireland 5.3 0.9 . . 2.2 . . 1.7 . . . . . . -0.098 tSaudi Arabiab 11.3 -5.3 4.1 10.3 11.6 -10.4 8.1 6.1 10.5 4.499 tlsrael" 6.8 2.2 . . . . . . .

100 New Zealand" 2.5 2.9 3.1 4.0 . . 3.3 2.1

101 tSingapore" 10.1 5.4 2.8 -3.9 11.9 4.0 13.2 3.3 9.4 6.4102 tHong Kong 8.6 5.8 . . . . . . . . . . . . .

103 Italy 3.8 2.1 0.8 0.8 4.0 0.5 5.1 0.9 4.1 2.9104 United Kingdom 2.4 2.6 16d 3.2 05d 1.8 12d 1.3 22d 2.6105 Australiab 4.2 3.2 2.7 5.0 3.0 1.9 1.3 0.4 5.7 3.1

106 Belgium" 3.9 1.3 0.5 2.6 4.4 1.1 4.7 2.3 3.8 1.2107 Netherlandsb 4.1 1.5 4.7 5.4 4.0 . . 4.8 . . 4.4108 Austria" 4.3 1.6 2.2 0.8 4.5 1.1 4.7 1.6 4.4 1.9109 Franceb 4.3 1.6 1.0 2.6 4.3 -0.1 5.2 -0.5 4.6 2.3110 Germany, Fed. Rep.b 3.3 1.6 1.4 1.9 2.8 0.4 3.3 1.0 3.7 2.1

111 Finland 4.0 2.8 0.0 -1.1 4.4 2.7 4.9 3.1 4.7 3.9112 tKuwait" 1.3 -1.1 . . 23.6 . . -2.3 . . 1.4 . . -0.9113 Denmark 2.9 2.5 0.8 4.3 1.8 3.1 3.1 2.2 3.5 2.2114 Canada 5.0 2.9 0.7 2.6 3.5 3.0 3.8 3.6 6.7 2.1115 Sweden 2.9 1.3 -0.2 1.5 2.3 2.6 2.4 2.5 3.4 1.8

116 Japan" 6.3 3.8 0.8 0.8 8.5 4.9 9.4 6.7 5.2 3.1117 tUnited Arab Emirates . . -4.3 . . 11.6 . . -8.4 . . 9.6 . . 4.8118 Norway 4.4 3.7 -0.4 2.0 5.6 4.4 2.6 1.8 4.2 3.5119 UnitedStates"' 2.7 3.1 1.0 3.5 1.7 2.9 2.5 3.9 3.4 3.0120 Switzerland" 2.0 1.7

Total reporting economiesOil exporters

4.1 w6.5 w

2.9w0.7w

2.2 w3.1w

3.2 w2.4w

3.9w6.3w

2.5 w-1.5w

4.3 w7.7w

3.7 w2.8w

4.2w7.7w

2.9w2.7w

Nonreporting nonmembers

Table 3. Structure of production

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

168

GDP'(millions ofdo!Jars)

Distribution ofgross domestic product (percent)

Agriculture Industry (Manufacturzng)b Services, etc.

1965 1987 1965 1987 1965

27 w31 w17 w

1987

37 w41w27 w

1965 1987 1965 1987

Low-income economiesChina and IndiaOther low-income

155,450111,85042,880

756,130t514,210239,390

43w42w45w

31w30w33w

20w24w9w 12w

30w27w38w

32w29w40w

I Ethiopia 1,180 4,800 58 42 14 18 7 12 28 402 Bhutan' 250 51 16 4 323 Chad' 290 980 42 43 15 18 12 15 43 394 Zaire' 3,140 5,770 21 32 26 33 16 53 355 Bangladesh' 4,380 17,600 53 47 11 13 5 7 36 39

6 Malawi 220 1,110 50 37 13 18 37 457 Nepal 730 2,560 65 57 11 14 3 5 23 298 LaoPDR .. 7009 Mozambique 1,490 50 12 38

10 Tanzania 790 3,080 46 61 14 8 8 5 40 31

11 Burkina Faso 260 1,650 53 38 20 25 15 27 3812 Madagascar' 670 2,070 31 43 16 16 11 53 4213 Malic 260 1,960 65 54 9 12 5 6 25 3514 BunindiIS Zambia'

1501,060

1,1502,030 14

5912 54

, 14

36 69

23 322752

16 Nigerc 670 2,160 68 34 3 24 2 9 29 4217 Uganda 1,100 3,560 52 76 13 5 8 5 35 1918 China 65,590 293,380 39 31 38 49 300 340 23 2019 Somalia 220 1,890 71 65 6 9 3 5 24 2620 Togo' 190 1,230 45 29 21 18 10 7 34 54

21 India 46,260 220,830 47 30 22 30 15 20 31 4022 Rwanda' 150 2,100 75 37 7 23 2 16 18 4023 SierraLeone 320 900 34 45 28 19 6 4 38 3624 Benin 220 1,570 59 46 8 14 4 33 3925 CentralAfrican Rep. 140 1,010 46 41 16 13 4 8 38 46

26 Kenya 920 6,930 35 31 18 19 11 11 47 5027 Sudan 1,330 8,210 54 37 9 15 4 8 37 4828 Pakistan 5,450 31,650 40 23 20 28 14 17 40 4929 Haitic 350 2,25030 Lesotho 50 270 65 21 5 28 1 15 30 51

31 Nigeria 5,850 24,390 54 30 13 43 6 8 33 2732 Ghanac 2,050 5,080 44 51 19 16 10 10 38 3333 SriLanka 1,770 6,040 28 27 21 27 17 16 51 4634 Yemen, PDRC 840 16 23 6135 Mauritania 160 840 32 37 36 22 4 32 41

36 Indonesia' 3,840 69,670 56 26 13 33 8 14 31 4137 Liberia 270 990 27 37 40 28 3 5 34 3538 Afghanistan 60039 Burma' .

40 Guinea' 520

41 Kwnpuchea, Dem.42 VietNam

Middle-income economies 198,180 t 1,959,680 1 20 w 34w 19w 46wLower-middle-income 102,382 t 737,643 1 21 w 29w 18w 50w

43 Senegal' 810 4,720 25 22 18 27 14 17 56 5244 Boliviac 710 4,470 23 24 31 24 15 13 46 5345 Zimbabwe 960 5,240 18 11 35 43 20 31 47 4646 Philippines' 6,010 34,580 26 24 28 33 20 25 46 4347 Yemen Arab Rep.' . 4,270 . . 28 17 12 55

48 Morocco' 2,950 16,750 23 19 28 31 16 18 49 5049 Egypt, Arab Rep. 4,550 34,470 29 21 27 25 14 45 5450 Papua New Guinea' 340 3,030 42 34 18 26 . . 9 41 4051 Dominican Rep.' 890 4,910 23 17 22 30 16 16 55 5352 Côted'Ivoire 760 7,650 47 36 19 25 11 16 33 39

53 Honduras 460 3,530 40 22 19 24 12 15 41 5554 Nicaragua' 570 3,200 25 21 24 34 18 28 51 4655 Thailand' 4,390 48,200 32 16 23 35 14 24 45 4956 ElSalvador' 800 4,750 29 14 22 22 18 17 49 6457 Congo,People'sRep.' 200 2,150 19 12 19 33 8 62 55

58 Jamaica' 970 2,860 10 6 37 41 17 22 53 5359 Guatemala' 1,330 7,040 . . . . . . . . . . . . .

60 Cameroon' 810 12,660 33 24 20 31 10 13 47 4561 Paraguay' 440 4,570 37 27 19 26 16 16 45 4762 Ecuador' 1,150 10,610 27 16 22 31 18 19 50 53

63 Botswana' 50 1,520 34 3 19 57 12 6 47 4064 Tunisia 880 8,450 22 18 24 32 9 15 54 5065 Turkey 7,660 60,820 34 17 25 36 16 26 41 4666 Colombia 5,570 31,940 30 19 25 35 18 19 46 4667 Chile' 5,940 18,950 9 40 . . 24 . 52

a. See the technical notes. b. Because manufacturing is generally the most dynamic part of the industrial sector, its share of GDP is shown separately. c. GDP and itscomponents are shown at purchaser values. d. World Bank estimate. e. Services, etc. includes the unallocated share of GDP.

169

GDP(millions ofdollars)

Distribution ofgross domestic product (percent)

Agriculture Industry (Manufacturing)5 Services, etc.

1965 1987 1965 1987 1965 1987 1965 1987 1965 1987

68 Penic 5,020 45,150 18 11 30 33 17 23 53 5669 Mauritius 190 1,480 16 15 23 32 14 24 61 5370 Jordan 4,270 9 28 13 6471 Costa Ricac 590 4,310 24 18 23 29 53 5372 SyrianArabRep.c 1,470 23,990 29 27 22 19 49 54

73 Malaysiac 3,130 31,230 28 25 9 4774 Mexicoc 21,640 141,940 14 9 27 34 20 25 59 5775 South Africa 10,540 74,260 10 6 42 44 23 23 48 5076 Po1and77 Lebanon 1,150 12 21 67

Upper-middle-income 96,080 t 1,240,630 t 19 w 38 w 20 w 43 w

78 Brazil 19,450 299,230 19 ii 33 38 26 28 48 5179 Uniguay 930 6,420 15 13 32 32 27 53 5580 HungaIyc 26,060 15 40 4481 Panamac 660 5,490 18 9 19 18 12 8 63 7382 Argentinac 16,500 71,530 17 13 42 43 33 31 42 44

83 Yugoslavia 11,190 59,960 23 11 42 43 35 4584 Algeriac 3,170 64,600 15 12 34 42 11 12 51 4585 Korea,Rep.c 3,000 121,310 38 11 25 43 18 30 37 4686 Gabonc 230 3,500 26 11 34 41 40 4887 Portugal 34,290 9 40 51

88 Venezuelac 9,820 49,610 6 6 40 38 22 55 5689 Greece 5,270 40,900 24 16 26 29 16 18 49 5690 TrinidadandTobago 690 4,260 8 4 48 39 .. 10 44 5791 Libya 1,500 5 63 3 3392 Omanc 60 8,150 61 3 23 43 0 6 16 54

93 Iran, IslamicRep. 6,170 26 36 12 3894 Iraq 2,430 18 46 8 3695 Romania

Low- and middle-incomeSub-Saharan Africa

356,86026,770

2,687,970128,840

30 w43 w ii

31w19w 28w

20 w9w ii

39w39w 40w

East Asia 90,670 708,540 38 w 21 w 34w 45w 26 w 28w 35wSouth Asia 60,260 288,260 46 w 31w 21w 28w 14 w 18 w 34w 41wEurope, M.East, & N.Africa 68,330 24 w 35w 40wLatin America & Caribbean 95,000 730,300 16w 33w 23 w 51w

17 highly indebted 115,050 t 830,320 t 19 w 33w 21w 48w

High-income economies 1,391,6601 12,370,8001 5 w 41 w 30w 55 wOECD members 1,373,3801 12,130,500 1 5 w 41 w 30w 55 w

tOther 10,980 t 209,050 t 5 w 54w 11 w 41 w

96 Spainc 23,750 287,970 15 6 36 37 . 27 49 5797 Ireland 2,340 21,910 10 37 .. 5398 tSaudiArabiac 2,300 71,470 8 4 60 50 9 9 31 4699 tlsraelc 3,591,) 35000 ..

100 New Zealandc 5,410 31,850 8 31 21 61

101 tSingaporec 970 19,900 3 1 24 38 15 29 74 62102 tHong Kong 2,150 36,530 2 0 40 29 24 22 58 70103 Italyc 72,150 748,620 10 4 37 34 25 23 53 61104 United Kingdom 89,100 575,740 3 2 46 38 34 25 51 60105 Australiac 22,920 183,280 9 4 39 33 26 17 52 63

106 Belgiumc 16,840 142,300 5 2 41 31 30 22 53 67107 Netherlandsc 19,640 214,420 . . 4 . . 30 . . 19 . . 66108 Austriac 9,480 117,660 9 3 46 37 33 26 45 60109 France° 99,660 873,370 8 4 38 31 27 22 54 66110 Germany, Fed. Rep.c 114,790 1,117,780 4 2 53 38 40 33 43 60

ill Finland 7,540 77,900 16 7 37 35 23 24 47 58112 tKuwaitc 2,100 17,940 0 1 70 51 3 11 29 48113 Denmark 8,940 85,480 9 5 36 29 23 20 55 66114 Canada 46,730 373,690 6 3 41 35 27 19 53 62115 Sweden 19,880 137,660 6 3 40 35 28 24 53 62

116 Japanc 91,110 2,376,420 9 3 43 41 32 29 48 57117 tUnited Arab Emirates . . 23,720 . 2 . . 57 . . 10 . 41118 Norwayc 7,080 83,080 8 4 33 35 21 15 59 62119 United Statesc 700,970 4,497,220 3 2 38 30 28 20 59 68120 Switzerlandc 13,920 170,880

Total reporting economies 1,749,600 1 15,139,800 lOw 39w 28w 52wOil exporters 78,020 1 845,520 19w 32w 14w 48w

Nonreporting nonmembers

Table 4. Agriculture and food

170

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Value added

in agriculture(millions of

current dollars)

Cereal imports

(thousands of

metric tons)

Food aidin cereals

(thousands of

metric tons)

Fertilizer consumption

(hundreds of grams

ofplant nutrient perhectare of arable land)

Average index of

food production

per capita(1979-81=100)

1985-871970 1987 1974 1987 1974/75 1986/87 1970 1986

Low-income economies 83,666 t 236,213 t 22,767 t 27,750 t 6,002 t 6,677 t 161 w 706w 115 wChina and India 55,045 t 155,356 t 11,295 t 15,943 t 1,582 t 791 t 224 w 997 w 119wOther low-income 28,413 t 80,006 t 11,472 t 11,807 t 4,420 t 5,886 I 72 w 318 w 106 w

I Ethiopia 931 2,031 118 609 54 570 4 66 892 Bhuta&' . . 109 3 18 0 3 . . 10 1123 Chadb 142 418 37 71 20 29 7 13 1044 Zaire5 585 1,857 343 415 1 56 8 15 995 Bangladenh' 3,636 8,327 1,866 1,781 2,076 1,589 157 673 95

6 Malawi 119 411 17 11 0 10 52 131 877 Nepal 579 1,411 18 61 0 22 27 205 998 Lao PDR . . 53 37 8 0 2 0 1239 Mozambique . . 747 62 406 34 344 22 19 84

10 Tanzania 473 1,882 431 188 148 55 31 77 90

11 BurkinaFaso 126 626 99 164 28 22 3 61 11812 Madagascar5 266 879 114 140 7 115 61 23 9713 Malib 207 1,051 281 86 107 77 31 166 10114 Bumndi 159 681 7 13 6 2 5 23 10015 Zambiab 191 222 93 150 5 116 73 148 97

16 Niger5 420 729 155 83 73 11 1 7 8717 Uganda 929 2,710 36 26 0 15 14 . . 12318 China 31,818 90,102 6,033 15,897 0 583 410 1,740 12419 Somalia 167 1,224 42 343 111 156 25 16 10220 Tog&' 85 354 6 86 II 6 3 78 89

21 India 23,227 65,254 5,261 46 1,582 208 110 571 10922 Rwand&' 136 784 3 11 19 16 3 20 8623 SierraLeone 108 402 72 152 10 43 17 22 9824 Benjn 121 726 7 77 9 8 36 63 11425 CentralAfncanRep. 60 415 7 37 1 6 12 1 94

26 Kenya 484 2,139 15 274 2 107 238 518 9327 Sudan 757 3,044 125 707 46 890 28 67 10028 Pakistan 3,352 7,430 1,274 378 584 456 146 862 10529 Haitib . 83 178 25 89 4 23 9630 Lesotho 23 57 48 94 14 32 10 130 83

31 Nigeria 5,080 7,379 389 677 7 0 2 94 10532 Ghanab 1,030 2,568 177 223 33 64 13 27 10633 SriLanka 545 1,628 951 533 271 284 531 1,015 8334 Yemen,PDR" . . 132 148 212 0 10 . . 66 8735 Mauritania 58 310 115 206 48 30 II 50 90

36 1ndonesia' 4,340 17,769 1,919 2,001 301 379 133 980 11737 Liberia 91 368 42 117 3 2 63 46 9638 Afghanistan . . . . 5 64 10 103 24 10639 Burma 819 4,707 26 . 9 0 21 206 12740 Guinea 0 63 203 49 92 19 4 93

41 Kampuchea,Dem. 223 80 226 2 11 042 VietNam 1,854 653 64 76 513 620 I i4

Middle-income economies 49,192 40,543 t 71,827 1 1,925 t 5,361 1 327w 653 w 101 wLower-middle-income 28,500 22,000 t 36,535 1,600 t 5,338 t 355 w 661w 101w

43 Senegal" 208 1,024 341 431 27 80 17 40 10544 B0liyia" 202 1,056 209 258 22 219 7 20 9445 Zimbabwe 214 570 56 71 0 38 446 571 9146 Philippines" 1,996 8,371 817 910 89 349 287 425 9347 YemenArabRep." 118 1,192 158 835 33 83 1 111 115

48 Morocc&' 789 3,110 891 2,251 75 611 117 382 10949 Egypt,ArabRep. 1,942 7,291 3,877 9,326 610 1,977 1,312 3,193 10650 PapuaNewGuineab 240 858 71 184 0 0 58 314 9851 DominicanRep." 282 910 252 683 16 117 334 414 9952 Côted'Ivoire 462 2,728 172 675 4 0 74 83 105

53 Honduras 212 765 52 178 31 137 156 220 8854 Nicaragua" 193 570 44 129 3 35 215 535 7455 Thailand" 1,837 7,745 97 255 0 18 59 236 10756 El Salvador" 292 656 75 182 4 227 1,043 906 8957 Congo, People's Rep.b 49 262 34 97 2 0 114 59 92

58 Jamaica" 93 174 340 412 1 333 873 509 10259 Guatemala 0 0 0 138 284 9 193 298 621 9460 Cameroonb 364 3,009 81 290 4 6 34 75 9461 Paraguay" 191 1,240 71 2 10 2 98 57 10762 Ecuador" 401 1,707 152 347 13 53 133 409 101

63 Botswana" 28 48 21 137 5 44 15 5 7564 Tunisia 245 1,504 307 1,170 59 396 76 226 11465 Turkey 3,383 10,610 1,276 624 16 3 157 604 10166 Colombia 1,817 6,198 503 863 28 0 286 770 9767 Chile" 558 . 1,737 249 323 18 313 400 104

a. Average for 1969-71, b. Value added in agriculture data are at purchaser values. c. Value added in agriculture data refer to net domestic product at factorcost. d. Includea Luxembourg.

171

Value

in agriculture(millions

current

added

ofdollars)

Cereal imports

(thousands of

metric tons)

Food aidin cereals

(thousands of

metric tons)

Fertilizer consumption(hundreds of grams

ofplant nutrient perhectare of arable land)

Average index offood production

per capita(1979-81 =100)

1970 1987 1974 1987 1974/75 1986/87 1970a 1986 1985-87

68Perut' 1,351 4,773 637 1,894 37 237 300 313 98

69 Mauritius 30 220 160 197 22 15 2,095 2,364 103

70 Jordan 44 375 171 950 79 20 74 300 108

71 CostaRicat 222 793 110 195 1 54 1,001 1,616 92

72 SyrianArabRep." 435 6,528 339 1,374 47 31 68 435 96

73 Malaysiat' 1,198 1,023 2,130 1 489 1,570 126

74 Mexico" 4,462 12,205 2,881 4,797 4 232 737 9775 South Africa 1,362 4,194 127 266 422 621 8476 Polandt' 4,185 2,962 1,678 2,342 108

77 Lebanon" 136 354 479 26 37 1,354 577

Upper-middle-income 21,519 t 18,589t 35,4141 3281 25 t 295 w 645 w 101 w

78 Brazil 4,392 27,965 2,485 3,871 31 7 186 514 107

79 limguay 268 847 70 166 6 0 485 471 10080 Hungaryt' 1,010 4,022 408 660 . 1,497 2,615 11081 Panama" 149 479 63 116 3 1 387 616 9682 Argentina" 2,250 9,053 0 1 . . 26 43 98

83 Yugoslavia 2,212 6,815 992 782 770 1,315 9784 Algeria" 492 8,021 1,816 3,823 54 4 163 361 103

85 Korea,Rep." 2,311 13,817 2,679 8,758 234 . 2,450 3,853 100

86 Gabon" 60 379 24 56 22 9787 Portugal 3,180 1,861 1,344 428 978 103

88 Venezuela" 826 2,938 1,270 2,003 170 1,404 93

89 Greece 1,569 6,461 1,341 1,074 861 1,707 103

90 TrinidadandTobago 40 178 208 282 880 432 9591 Libya 93 612 1,426 62 184 7692 Omanb 40 232 52 287 936

93 Iran, Islamic Rep. 2,120 2,076 5,621 13 60 614 9994 Iraq 579 870 4,212 34 351 105

95 Romania 1,381 197 565 1,301 112

Low- and middle-income 134,381 I 476,848 1 63,309 t 99,577 1 7,928 1 12,039 1 230 w 683 w 111 w

Sub-Saharan Africa 14,988 1 42,714 I 3,9591 7,805 1 910 1 3,0561 33 w 86 w 100 w

East Asia 45,4461 152,121 r 14,8771 31,0861 923 1 1,4071 367 w 1,326w 121 w

South Asia 32,1981 88,877 t 9,404 1 2,833 1 4,522 t 2,562 t 114 w 586 w 109 wEurope, M.East, & NAfrica 19,526 t 23.405 t 40,252 I 1,010 1 3,289 t 475 w 960 w 105 w

Latin America & Caribbean 18,567 1 11,537 1 17,3341 563 t 1,725 t 176w 451 w 98 w

17 highly indebted 27,3801 13,657 t 20,351 I 637 1 1,8861 169w 425 w 101 w

High-income economies 89,077 t 303,305 1 68,943 I 73,740 1 53t 993 w 1,172w 104 w

OECD members 88,2731 298,9871 65,535 I 60,2551 995 w 1,163 w 103 w

lOther 7141 4,318 t 3,409 t 13,485 t 53t 514 w 3,131 w 134w

96 Spainb 12,557 4,675 1,943 593 909 104

97 Ireland 559 2,785 640 461 3,690 8,661 98

98 tSaudi Arabia" 219 3,446 482 8,627 54 3,496 20999 tlsraelc 295 . . 1,176 1,905 53 1,401 2,198 104

100 New Zealand" 869 3,210 92 57 7,745 6,219 110

101 tSingapore" 44 105 682 810 2,500 13,000 94102 tHong Kong 62 171 657 826 . . 0 56103 Italy 8,465 25,962 8,101 7,329 896 1,692 101

104 United Kingdom 2,995 8,567 7,540 3,722 2,631 3,798 108

105 Australia" 2,178 7,115 2 27 232 258 97

106 Belgium" 920 2,964 4585d 4,747d 5686d 5283d

107 Netherlandst' 1,827 8,456 7,199 4,593 7,493 7,695 110

108 Austria" 992 3,844 164 99 2,426 2,062 109

109 France" 9,366 26,979 654 1,130 2,435 3,091 106

110 Germany, Fed. Rep." 5,951 16,541 7,164 4,462 4,263 4,279 112

111 Finland 1,205 5,155 222 126 1,930 2,184 105

112 (Kuwait" 8 176 101 364 . . 1,000113 Denmark 882 4,134 462 351 2,234 2,445 121

114 Canada 3,280 10,449 1,513 447 191 474 110

115 Sweden 1,394 4,531 300 265 1,646 1,365 103

116 Japan" 12,467 65,384 19,557 27,795 3,882 4,271 109117 tUnited Arab Emirates . . 420 132 642 . . 737118 Norway 624 2,872 713 460 2,443 2,720 108

119 United States" 27,829 87,482 460 1,306 816 918 97120 Switzerland . . . . 1,458 911 3,831 4,204 106

Total reporting economies 221,239 1 . . 132,252 t 173,316 r 7,981 I 12,039 I 473 w 834 w 110 wOilexporters 22,4521 18,105t 46,905r l,038t 2,4661 143w 607w 108w

Nonreporting nonmembers 15,475 t 37,330 t 67 t 566 w 1,251 w 111 w

Table 5. Commercial energy

172

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Average annual energygrowth rate (percent)

Energy consumptionper capita(kilograms

of oil equivalent)

Energy importsas a percentage of

merchanthse exportsEnergy production Energy consumption

1965-80 1980-87 1965-80 1980-87 1965 1987 1965 1987

Low-income economies 10.0 w 4.4 w 8.2 w 4.6 w 126w 297w 6w lOwChina and India 9.1 w 6.0 w 8.8w 4.8w 146w 390w 4w SwOther low-income 12.4w -0.4w 5.0w 3.9w 73w 116w 8w 16w

1 Ethiopia 7.5 5.9 4.1 2.2 10 21 8 552 Bhutan3 Chad . . . . . . . . . . . . .

4 Zaire 9.4 3.6 3.6 1.2 74 73 6 2

5 Bangladesh . . 15.4 . . 8.1 47 21

6 Malawi 18.2 4.6 8.0 -0.2 25 40 7 10

7 Nepal 18.4 12.9 6.2 10.3 6 23 10 31

8 La0PDR . . -0.3 4.2 1.9 24 379 Mozambique 19.8 -44.1 2.2 1.9 81 86 13

10 Tanzania 7.3 3.0 3.7 2.2 37 35 10 56

11 BurkinaFaso . . . . 10.5 . . 7 . . 11 7

12 Madagascar 3.9 10.0 3.5 1.4 34 39 8 3613 Mali 38.6 9.4 7.0 2.6 14 24 16 3214 Burundi . . 13.3 6.0 9.2 5 20 11 8

15 Zambia 25.7 1.2 4.0 0.1 464 380 6 II

16 Niger . . 16.5 12.5 3.2 8 42 9 9

17 Uganda -0.5 3.5 -0.5 4.2 36 26 1 17

18 China 10.0 5.5 9.8 4.4 178 525 0 2

19 Somalia . , . . 16.7 1.8 14 81 8 9

20 Togo 2.9 9.7 10.7 -2.2 27 52 4 8

21 India 5.6 8.1 5.8 6.0 00 208 8 17

22 Rwanda 8.8 6.6 15.2 4.6 8 42 10 5323 SierraLeone . . 0.8 1.3 109 77 11 1024 Benin25 CentralAfrican Rep.

. ,

6.79.30.9

9.92.2

5.04.1

2122

4630

109

97

26 Kenya 13.1 9.2 4.5 -0.2 110 99 13 3927 Sudan 17.8 1.2 2.0 0.6 67 58 5 3828 Pakistan 6.5 6.9 3.5 6.5 135 207 7 2629 Haiti 4.7 8.4 1.6 24 50 6 1630 Lesotho . , . . ,

. 10 I

31 Nigeria 17.3 -3.3 12.9 5.9 34 133 7 3

32 Ghana 17.7 -8.1 7.8 -4.1 76 129 6 14

33 SriLanka 10.4 9.5 2.2 3.9 106 160 6 2534 Yemen, PDR -6.4 2.6 . . 707 .

35 Mauritania 9.5 0.1 48 113 2 8

36 Indonesia 9.9 1.0 8.4 3.9 91 216 3 13

37 Liberia 14.6 -1.9 7.9 -10.1 182 169 6 11

38 Afghanistan 15.7 1.5 5.6 12.6 30 71 8

39 Burma 8.4 5.0 4.9 5.4 39 73 440 Guinea 16.5 1.5 2.3 0.9 56 59

41 Kampuchea,Dem. . 5.7 7.6 2.1 19 59 742 VietNam 5.3 0.5 -2.6 1.6 106 88

Middle-income economies 3.7 w 3.3 w 6.6w 2.8w 585 w 1,077w 8w 11wLower-middle-income 6.6 w 4.7 w 5.9w 2.4w 531 w 863w 8w lOw

43 Senegal . . . . 7.4 -1.7 79 155 8 2444 Bolivia 9.5 -0.4 7.7 -1.7 156 258 1 2

45 Zimbabwe -0.7 -0.4 5.2 0.4 441 512 7 646 Philippines - 9.0 10.1 5.8 -1.4 160 241 12 21

47 YemenArabRep. . . 21.0 12.0 7 100

48 Morocco 2.5 -1.1 7.9 2.5 124 242 5 27

49 Egypt, Arab Rep. 10.7 7.5 6.2 6.6 313 588 11 5

50 PapuaNewGuinea 13.7 6.5 13.0 2.5 56 229 II 10

51 Dominican Rep. 10.9 6.2 11.5 2.5 127 335 8 3752 Côte d'Ivoire 11.1 8.6 101 5 11

53 Honduras 14.0 4.5 7.6 2.5 Ill 192 5 15

54 Nicaragua 2.6 1.0 6.5 1.7 172 256 6 3355 Thailand 9.0 40.2 10.1 7.3 82 330 Il 15

56 ElSalvador 9.0 3.5 7.0 1.6 140 218 5 14

57 Congo, People's Rep. 41.1 8.6 7.8 4.7 90 223 10 5

58 Jamaica -0.9 4.7 6.1 -3.6 703 853 12 31

59 Guatemala 12.5 7.1 6.8 -0.7 150 169 9 16

60 Camemon 13.0 17.1 6.3 6.4 67 144 6

61 Paraguay . . 13.6 9.7 4.8 84 224 16 10

62 Ecuador 35.0 1.1 11.9 1.4 162 625 11 3

63 Botswana 8.8 2.6 9.5 2.3 191 429 16 6

64 Tunisia 20.4 -1.2 8.5 6.0 170 496 12 15

65 Turkey 4.3 9.1 8.5 7.3 258 763 12 31

66 Colombia 1.0 10.4 6.0 2.1 413 757 1 2

67 Chile 1.8 3.2 3.0 1.5 652 822 5 9

a. Includes Luxembourg.

173

Average annual energygrowth rate (percent)

Energy consumptionper capita(kilograms

of oil equivalent)

Energy importsas a percentage

merchandiseof

exportsEnergy production Energy consumption

1965-80 1980-87 1965 -80 1980-87 1965 1987 1965 1987

68 Peni 6.6 -0.7 5.0 0.2 395 485 3 1

69 Mauritius 2.1 6.7 7.2 2.9 160 382 6 770 Jonlan . . . 9.3 7.9 226 750 33 5371 Costa Rica 8.2 6.9 8.8 2.6 267 580 8 1272 SyrianArabRep. 56.3 2.7 12.4 4.4 212 900 13 40

73 Malaysia 36.9 17.0 6.7 6.2 313 771 11 474 Mexico 9.7 2.7 7.9 0.6 605 1,299 475 South Africa 5.1 5.9 4.3 3.7 1,744 2,465 5 076 Poland 4.0 1.9 4.8 0.9 2,027 3,386 . . 1577 Lebanon 2.0 -5.4 2.0 3.5 713 871 51

Upper-middle-income 2.7w 2.4w 7.3 w 3.0w 653 w 1,392w 8w 12 w

78 Brazil 8.6 10.4 9.9 4.0 286 825 14 1779 Umguay 4.7 11.9 1.3 -2.0 765 760 13 1580 Hungary 0.8 1.8 3.8 1.1 1,825 3,062 12 1881 Panama 6.9 11.1 5.8 4.5 576 1,627 61 2982 Argentina 4.5 1.9 4.3 1.5 975 1,472 8 10

83 Yugoslavia 3.5 3.0 6.0 3.2 898 2,115 7 1984 Algeria 5.3 4.7 11.9 5.3 226 1,003 0 285 Korea,Rep. 4.1 9.9 12.1 5.9 238 1,475 18 1386 Gabon 13.7 0.2 14.7 3.0 153 1,121 3 1

87 Portugal 3.6 5.8 6.5 2.7 506 1,322 13 17

88 Venezuela -3.1 -2.0 4.6 2.3 2,319 2,394 0 089 Greece 10.5 9.3 8.5 2.7 615 1,971 29 2890 TrinidadandTobago 3.8 -3.3 6.6 -0.3 2,776 5,182 60 491 Libya 0.6 -6.0 18.2 4.7 222 2,674 292 Oman 23.0 11.0 30.5 9.4 14 2,130 2

93 Iran, Islamic Rep. 3.6 7.2 8.9 2.6 537 955 094 Iraq 6.2 3.0 7.4 4.9 399 732 095 Romania 4.3 0.7 6.6 0.9 1,536 3,464

Low- and middle-income 5.5 w 3.7w 7.2 w 3.5 w 253 w 503 w 7w 11wSub-Saharan Africa 15.3 w -1.3w 5.6w 2.3 w 71w 82 w 7w 10wEast Asia 9.8 w 5.5 w 9.4 w 4.4 w 168 w 477 w 6w 9wSouth Asia 5.8 w 5.7 w 5.7 w 5.2 w 99 w 183 w 7w 20 wEurope, M.East, & N.Africa 4.4 w 2.8w 6.2 w 2.7w 746 w 1,204 w 9w 19 wLatin America & Caribbean 1.9w 2.5 w 6.9 w 1.9w 515 w 1,071w 8w 9w

17 highly indebted 3.6w 1.7w 6.9w 2.1 w 420w 776w 6w lOw

High-income economies 3.1 w -0.1 w 3.1 w 0.6w 3,707 w 4,953 w 11 w 11 wOECD members 2.1 w 1.8 w 3.0 w 0.5 w 3,748 w 6,573 w 11 w 12w

tOther 7.7w -9.8w 5.7w 2.8w 1,943w 3,030w 7w 7w

96 Spain 3.6 7.8 6.5 1.9 901 1,939 31 2397 Ireland 0.1 5.8 3.9 1.2 1,504 2,503 14 698 tSaudi Arabia 11.5 -14.4 7.2 5.0 1,759 3,292 099 lIsrsel -15.2 -16.3 4.4 1.3 1,574 1,965 14 12

100 New Zealand 4.7 7.6 3.6 3.8 2,622 4,211 7 7

101 tSingapore 10.8 -1.0 670 4,436 17 21102 tHong Kong . . . . 8.4 4.1 413 1,525 4 3103 Italy 1.3 1.2 3.7 0.0 1,568 2,676 16 14104 United Kingdom 3.6 2.6 0.9 1.1 3,481 3,805 13 8105 Australia 10.5 6.6 5.0 0.6 3,287 4,821 II 6

106 Belgium -3.9 10.6 2.9 0.1 3,402 4,844 9 9107 Netherlands 15.4 -1.2 5.0 1.3 3,134 5,198 12 11

108 Austria 0.8 -0.8 4.0 0.9 2,060 3,465 10 9109 France -0.9 8.0 3.7 0.6 2,468 3,729 16 12

110 Germany,Fed.Rep. -0.1 0.3 3.0 0.2 3,197 4,531 8 7

111 Finland 3.8 8.7 5.1 3.1 2,233 5,581 11 13

112 tKuwait -1.6 -1.3 2.1 3.8 . . 4,715 0 0113 Denmark 2.6 56.8 2.4 1.0 2,911 3,887 13 8

114 Canada 5.7 3.7 4.5 0.9 6,007 9,156 8 5

115 Sweden 4.9 6.6 2.5 2.3 4,162 6,453 12 8

116 Japan -0.4 5.1 6.1 1.7 1,474 3,232 19 17117 tUnited Arab Emirates 14.7 -1.7 36.6 5.4 105 5,094 4 2118 Norway 12.4 5.7 4.1 2.7 4,650 8,932 11 6119 United States 1.1 0.4 2.3 0.1 6,535 7,265 8 19120 Switzerland 3.7 1.8 3.1 2.0 2,501 4,105 8 5

Total reporting economies 4.0w 1.3w 4.0w 1.4w 1,007w 1,253w 10w 11wOil exporters 5.8w -2.2w 7.4 w 3.0 w 325 w 766 w 5 w 4w

Nonreporting nonmembers 4.6 w 2.8 w 4.4 w 2.8 w 2,509 w 4,777 w

Table 6. Structure of manufacturing

174

Distribution of manufacturing value added (percent; current prices)

Machinery andTextiles and transport

clothing equipment

410

o o o

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

1970 1986 1970 1986 1970

Low-income economies 42,814 t 163,354China and India 35,754 t 129,774Other low-income 6,244 t 31,119

1 Ethiopia 149 518 46 51 312 Bhutan" 83 Chadb4 Zaire"

51286

132th 40

.

165 Bangladesh" 387 1,249 30 26 47

6 Malawi 51 177 Nepal 1138 La0PDR9 Mozambique si .. L3

10 Tanzania 116 227 36 28 28

11 Burkina Faso 174 69 62 912 Madagascar" 118 36 35 2813 Mali" 25 100 36 4014 Bumndi 16 102 53 2515 Zambia" 181 461 49 44 9

16 Niger" 30 14217 Uganda18 China

15828,794'

15291,463'

40 ii 20.

19 Somalia 26 72 88 46 620 Togob 25 49

21 India 6,960 38,311 13 11 2122 Rwanda" 8 310 86 77 023 Sierra Leone 22 47 6524 Benin 19 48 5825 Central African Rep. 12 59

26 Kenya 174 709 31 35 927 Sudan 140 537 39 22 3428 Pakistan 1,462 5,073 24 34 3829 Haiti"30 Lesotho ii31 Nigeria 543 5,19632 Ghana" 252 639 1633 SnLanka 321 888 26 1934 Yemen,PDR35 Mauritania 10

36 Indonesia" 994 10,592 2337 Liberia 15 4738 Afghanistan39 Burma40 Guinea

41 Kampuchea,Dem.42 VietNam

Middle-income economies 63,310 t 388,586Lower-middle-income 30,215 t 137,170

43 Senegal" 141 626 51 48 1944 Bolivia" 135 529 33 37 3445 Zimbabwe 293 1,444 24 28 1646 Philippines" 1,622 7,584 39 40 847 Yemen Arab Rep." 10 491 20 50

48 Morecco" 641 2,582 . . 26 . .

49 Egypt, Arab Rep. 4,388 17 20 3550 Papua New Guinea" 35 228 25 52 1

51 Dominican Rep.b 275 841 74 63 552 Côte d'Ivoire 149 1,191 27 16

53 Honduras 91 482 58 56 1054 Nicaragua" 159 759 53 54 1455 Thailand" 1,130 9,700 43 30 1356 El Salvador" 194 612 40 37 3057 Congo, People's Rep." 177 65 47 4

58 Jamaica" 221 553 46 50 759 Guatemala 42 41 1460 Camemon" 119 1,321 47 50 1661 Paraguay" 99 572 56 . . 1662 Ecuador" 305 2,230 43 33 14

63 Botswana" 5 67 . . 52 ..64 Tunisia 121 1,161 29 17 1865 Turkey 1,930 13,340 26 20 1566 Colombia 1,154 5,817 31 34 2067 Chile" 2,092 . . 17 27 12

Chemicals Other'

1970 1986 1970 1986

2 3 21 22

0 . . i510 8 29 29II 17 10 15

10 20

4 7 26 31

1 1 19 177 23 155 146 .. 16

10 9 27 25

3410 .. 382 6 31

14 15 32 322 12 8 9

4 305 21

7 9 35 295 21 19 319 12 23 25

0 0

41II 33

10 47

15 2 6 6 7 22 2416 0 2 3 4 29 4116 9 10 II 9 40 367 8 7 13 10 32 35

0 1 . . 28

16 . . lO . . II . . 3727 9 13 12 10 27 31

1 37 lO 5 3 33 357 1 1 6 5 14 24

10 . . 5 42

10 1 1 4 4 28 2912 2 2 8 10 23 2217 9 14 6 6 29 3314 3 5 8 16 18 2813 1 3 7 9 23 29

6 . . . . 10 13 36 3111 4 3 12 17 27 2813 5 7 4 6 28 23

. I . . 5 . 2113 3 7 8 10 32 38

12 . 0 . . 4 . 3219 4 7 13 13 36 4414 8 15 7 8 45 4314 8 8 II 13 29 317 11 4 5 8 55 55

1986 1970 1986

23 0 0

40 . .

16 7 836 3 6

3

::26 5

18 2 247 6 3

4

13 9

213 2621 0 0

16 20 261 3 0

016 0

12 18 1425 3 1

21 6 8

Value added

in manufacturing(millions of Food and

current dollars) agriculture

Value added Distribution of msmafacturing value added (percent; current prices)

in manufacturing Machinery and(millions of Food and Textiles and transport

current dollars) agriculture clothing equipment Chemicals Other'

a. Includes unallocable data; see the technical notes. b. Value added in manufacturing data are at purchasers values. c. World Bank estimate.

175

1970 1986 1970 1986 1970 1986 1970 1986 1970 1986 1970 1986

68 Penst' 1,430 6,746 25 24 14 11 7 10 7 11 47 4469 Mauritius 26 284 75 35 6 39 5 3 3 4 12 1970 Jonlan 32 508 21 28 14 5 7 2 6 7 52 5871 Costa Rica 48 47 12 10 6 6 7 10 28 2772 SyrianArabRep. 37 28 40 19 3 10 2 6 19 38

73 Malaysiat' 500 26 21 3 5 8 23 9 14 54 3774 Mexic&' 8,449 31,968 28 24 15 12 13 14 11 12 34 3975 South Africa 3,914 12,270 15 14 13 8 17 17 10 11 45 4976 Po1and' 20 15 19 16 24 30 8 6 28 3377 Lebanon' 27 19 1 3 . 49

Upper-middle-income 33,064 t 254,917

78 Brazil 10,429 69,406 16 15 13 12 22 24 10 9 39 4079 Uniguay 1,433 34 29 21 18 7 8 6 10 32 3580 Hungaiy" 12 6 13 11 28 37 8 11 39 3581 Panamat' 127 422 41 48 9 7 1 3 5 8 44 3482 Argentin&' 5,750 21,496 24 24 14 10 18 16 9 12 35 37

83 Yugoslavia 10 13 15 17 23 25 7 6 45 3984 Algeria" 682 7,401 32 26 20 20 9 II 4 1 35 4185 Korea,Rep." 1,880 29,397 26 15 17 17 11 24 II 9 36 3586 Gabon" 37 7 6 6 4487 Portugal 18 17 19 22 13 16 10 8 39 38

88 Venezuela" 2,140 14,072 30 23 13 8 9 9 8 11 39 4989 Greece 1,642 6,482 20 20 20 22 13 14 7 7 40 3890 Tnnidadand Tobago 198 396 18 41 3 5 7 15 2 7 70 3291 Libya 81 0

92 Oma&' 464 29 0 0 0 71

93 Iran, Islamic Rep. 1,501 30 13 20 22 18 22 6 7 26 3694 Iraq 325 , 26 14 7 3 5095 Romania

Low- and middle-income 107,564 t 547,989Sub-Saharan Africa 3,270 t 16,113East Asia 37,490 1 189,131South Asia 9,398 I 46,406Europe, M.East, & N.AfricaLatin America & Caribbean 34,359 t 166,895

17 highly indebted 38,995 1 193,428

High-income economies 603,419 t 2,524,574OECD members 598,731 1 2,488,845

tOther 2,350 I 29,216

96 Spain" . . 44,822 13 17 15 9 16 22 11 9 45 4397 Ireland 785 . . 31 28 19 7 13 20 7 15 30 2898 tSaudi Arabiab 372 7,173 . . . . . . . . . . . . . . . .

99 tlsrael" . . . 15 13 14 10 23 28 7 8 41 42100 New Zealand" 1,721 5,037 24 26 13 10 15 16 4 6 43 43

101 tSingapore" 379 4,678 12 6 5 5 28 46 4 8 51 36102 tHongKong 1,013 7,978 4 6 41 40 16 20 2 2 36 33103 Italy 30,942 140,078 10 7 13 13 24 32 13 10 40 38104 UnitedKingdom 36,044 118,048 13 14 9 6 31 32 10 11 37 36105 Australiab 9,058 29,296 16 18 9 7 24 21 7 8 43 45

106 Belgium" 8,226 26,055 17 19 12 8 22 23 9 13 40 36107 Netherlands" 8,545 34,690 17 19 8 4 27 28 13 11 36 38108 Austria" 4,873 25,461 17 17 12 8 19 25 6 6 45 43109 France" 38,861 160,556 14 18 10 7 29 33 8 9 39 33110 Germany, Fed, Rep.b 70,888 294,808 13 12 8 5 32 38 9 10 38 36

Ill Finland 2,588 14,847 13 13 10 6 20 24 6 7 51 50112 tKuwait" 120 1,902 5 10 4 7 1 7 4 9 86 67113 Denmark 2,929 13,887 20 22 8 6 24 23 8 10 40 39114 Canada 17,002 59,617 16 15 8 7 23 25 7 9 46 44115 Sweden 8,477 28,385 10 10 6 2 30 35 5 8 49 44

116 Japanb 73,339 573,536 8 10 8 6 33 38 11 10 40 37117 tUnited Arab Emirates . . 2,290 . . . . . . . . . . . . . . . . .

118 Norway 2,416 10,698 15 21 7 3 23 26 7 7 49 44119 United States" 253,864 835,793 12 12 8 5 31 35 10 10 39 38120 Switzerland" 10 . 7 31 9 42

Total reporting economies 715,256 t 3,087,882Oil exporters 19,676 r 123,904

Nonreporting nonmembers

Table 7. Manufacturing earnings and outputEarnings per employee

Middle-income economiesLower-middle-income

176

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Growth rates index (1980=100) percentage of value added (1980=100)

1970-80 1980-86 1984 1985 1986 1970 1984 1985 1986 1970 1984 1985 1986

Low-income economiesChina and IndiaOther low-income

1 Ethiopia -4.6 -3.1 94 77 87 24 19 19 19 61 109 110 1112 Bhutan3 Chad4 Zaire5 Bangladesh -2.9 -3.7 86 84 79 26 32 32 32 116 98 98 96

6 Malawi 36 1217 Nepal . .

8 LaoPDR9 Mozambique . 29

10 Tanzania -11.4 57 52 47 42 34 34 34 122 84 87 90

11 Burkina Faso 2.6 105 107 118 . . 20 20 20 . . 115 117 12012 Madagascar -0.9 -12.9 62 . . 36 36 91 5713 Mali -8.4 4614 Bumndi -7.8 ..15 Zambia -3.3 0.2 100 100 114 34 26 26 26 109 102 109 78

16 Niger17 Uganda18 China19 Somalia -6.4 -8.6 71 69 61 28 30 30 30 6920 logo21 India -0.2 5.6 120 130 132 47 48 48 48 95 142 153 16422 Rwanda 22 1923 Sierra Leone24 Benin25 Central African Rep.

26 Kenya -3.4 -3.7 82 79 81 53 46 46 46 38 93 94 9627 Sudan . . . . 3128 Pakistan 3.4 8.8 140 146 154 21 20 20 20 51 150 164 17929 Haiti -3.3 -0.5 107 102 10530 Lesotho 48 48 48

31 Nigeria 0.0 18 10532 Ghana 23 19333 Sri Lanka 83 101 70 111 13534 Yemen, PDR35 Mauritania

36 Indonesia 4.7 9.2 132 153 176 26 18 21 24 42 138 157 18637 Liberia 1.6 111 107 9938 Afghanistan39 Burma40 Guinea

41 Kampuchea,Dem.42 VietNam

43 Senegal -4.8 -0.2 97 101 93 . . 43 44 44 . . 96 102 10344 Bolivia 2.5 4.4 122 44 35 68 62 .

45 Zimbabwe 1.6 6.1 114 143 145 43 44 44 44 98 108 118 12046 Philippines -3.0 . . 21 18 22 20 102 115 105 11247 Yemen Arab Rep. . . . .

48 Morocco . . . . . 51 51 5149 Egypt,ArabRep. 4.0 1.6 116 121 117 54 57 57 57 76 133 141 15550 PapuaNewGuinea 2.9 0.1 89 96 94 42 36 36 36 . . 96 103 101SI Dominican Rep. -1.0 -4.8 87 79 79 35 19 22 22 63 102 98 9852 Côte d'Ivoire -0.9 . . 27 52

53 Honduras -0.4 . 38 38 3854 Nicaragua . . -15.8 16 20 22 22 206 107 104 9955 Thailand 1.0 7.2 137 143 148 25 24 24 24 68 133 138 14056 ElSalvador 2.4 28 21 20 71 89 8757 Congo, People's Rep. 34 57 . .

58 Jamaica -0.2 . . 4359 Guatemala -3.2 -0.1 110 98 105 . . 24 23 2360 Cameroon 29 37 37 37 .

61 Paraguay . . . .

62 Ecuador 2.9 -1.1 104 103 94 27 38 44 39 S 83 106 104 90

63 Botswana 10.4 -4.2 81 85 . . . . 40 . . 69 . .

64 Tunisia 4.2 -4.9 83 78 76 44 47 47 47 95 91 87 8365 Turkey 3.7 -2.3 84 89 94 26 24 24 24 108 131 125 13966 Colombia -0.2 6.2 117 116 154 25 20 18 20 84 110 126 14067 Chile -1.5 105 97 107 19 15 14 15 60

Total earnings as Gross output per employee

High-income economiesOECD members

tOther

::73

576270

51

646460

73. .

656873

45

7563

Total reporting economiesOil exporters

Nonreporting nonmembers

177

Earnings per employee Total earningspercentage of

as

value addedGross output per employee

(1980 =100)Growth rates Index (1980=100)

1970-80 1980-86 1984 1985 1986 1970 1984 1985 1986 1970 1984 1985 1986

68 Pens . . 1.2 92 111 115 . . 19 19 19 82 70 66 7569 Mauritius 1.7 -3.1 94 84 84 34 48 46 48 139 96 80 7470 Jordan -1.1 101 98 97 37 30 32 31 . . 174 155 14471 CostaRica . . . 4172 SyrianArabRep. 2.2 -1.8 95 82 102 33 31 30 30 72 129 129 196

73 Malaysia 2.0 5.4 125 135 131 28 29 30 30 9674 Mexico 1.2 -4.0 73 88 85 44 21 26 26 77 111 109 10475 South Africa 2.7 0.4 109 106 102 46 50 50 49 45 97 98 10176 Poland . . .

77 Lebanon . . . . .

Upper-middle-income

78 Brazil 4.0 -1.1 91 93 95 22 20 20 20 71 68 70 7879 Uruguay . . -1.2 84 96 109 . . 21 22 25 . . 112 108 10780 Hungary 3.7 1.5 106 108 111 28 33 34 35 41 116 111 11181 Panama 0.2 4.4 127 130 125 32 33 34 33 67 92 91 9482 Argentina 1.7 4.4 126 104 118 30 23 19 21 83 115 108 127

83 Yugoslavia 1.3 -1.9 87 91 97 39 30 29 33 59 109 100 9884 Algeria 0.1 -3.9 88 84 73 45 53 53 53 101 93 92 8185 Korea,Rep. 10.0 5.8 119 125 138 25 26 27 27 40 139 141 15886 Gabon . . . .

87 Portugal 2.5 1.3 87 104 115 34 38 43 43 117 127

88 Venezuela 3.8 -0.4 109 110 106 31 26 26 27 118 111 109 10689 Greece 5.0 -0.3 99 102 94 32 39 39 39 57 99 104 9890 Trinidad and Tobago 2.4 . 65 7991 Libya 37 4592 Oman . 61 61 61

93 IranislamicRep. . . . . . . 25 8594 Iraq 3695 Romania

96 Spain 4.5 1.9 99 110 113 52 40 41 4197 Ireland 4.1 8.0 120 142 146 49 39 39 3998 (Saudi Arabia . . . .

99 tlsrael 8.8 -10.0 65 60 63 36 54 45 47100 New Zealand 1.2 -1.6 92 95 . . 62 59

101 tSingapore 3.6 8.8 142 152 165 36 36 38 37102 tHong Kong 6.1 2.6 105 111 115 . . 59 63 61103 Italy 4.1 0.4 103 99 104 41 46 43 43104 UnitedKingdom 1.7 3.0 109 111 121 52 44 43 44105 Australia 2.9 1.7 107 106 113 53 51 48 52

106 Belgium 4.3 -0.1 96 95 104 46 47 46 47107 Netherlands 2.5 3.6 112 111 124 52 57 57 57108 Austria 3.4 1.3 103 105 111 47 55 54 55109 France . . .

110 Germany,Fed.Rep. 3.5 1.0 101 102 107 46 48 46 45

111 Finland 2.6 2.1 107 110 114 47 43 43 49112 (Kuwait . . 4.1 112 102 142 12 44 41 41113 Denmark 2.5 -0.1 98 97 100 56 52 52 53114 Canada 4.2 2.8 102 116 116 53 46 49 49115 Sweden 0.4 0.1 97 98 100 52 37 37 37

116 Japan 3.2 1.8 107 109 ill 32 35 35 37117 tunited Arab Emirates . . . .

118 Norway 2.6 1.4 101 105 107 50 55 57 59119 UnitedStates 0.1 1.4 104 106 108 47 39 40 39120 Switzerland . . . .

122 126

114 i1114 114 126

122 116 122133 135 138107 115

124 125 130

116 118 120113 113 117114 117 105

116 122 134169 140 134113 110 106117 .

121 124 116

120 123 115

112 121 113112 115 117

Low- and middle-incomeSub-Saharan AfricaEast AsiaSouth AsiaEurope, M.East, & N.AfricaLatin America & Caribbean

17 highly indebted

Table 8. Growth of consumption and investment

178

Note: For data comparability and coversge, see the technical notes. Figures in italics are for years other than those specified.

Average annual growth rate (percent)

General governmentconsumption Private consumption, etc.

Grossdomestic investment

1965-80 1980-87 1965-80 1980-87 1965-80 1980-87

Low-income economies 6.8 w 4.4 w 4.1 w 4.4 w 8.7w 10.2 wChina and India 6.1 w 6.0 w 4.0 w 5.6 w 8.3 w 14.9 wOther low-income 8.3 w 0.7 w 4.4 w 2.4 w 9.6 w -1.9w1 Ethiopia 6.4 5.6 3.0 1.3 -0.1 2.02 Bhutan3 Chad .. . 0 . . . . .

4 Zaire 0.7 -10.9 1.5 0.4 6.7 1.35 Bangladesh a a 2.7 3.7 0.0 2.96 Malawi 5.6 4.5 4.4 2.6 9.0 -10.57 Nepal8 LaoPDR9 Mozambique . . -10.8 .. 0.9 . . -23.1

10 Tanzania a -7.1 4.1 5.0 6.1 -5.611 BurkinaFaso 8.7 3-4 2.0 2.5 8.8 2.012 Madagascar 2.0 -1.0 0.6 -0.1 1.5 -4.513 Mali 1.9 4-3 4.9 4.1 1.8 4.214 Burundi 7.3 2.9 3.7 2.1 9.0 5.415 Zambia 5.1 -2.5 -0.9 1.4 -3.6 -9.316 Niger 2.9 1.2 -2.4 2.3 6.3 -15.017 Uganda a . . 1.0 . . -5.718 China 6.0 4.9 5.3 6.1 10.5 19.019 Somalia 11.1 1.1 3.5 1.1 10.7 2.720 Togo 9.5 1.9 5.0 -0.3 9.0 -6.421 India 6.3 8.8 2.7 4.9 5.0 3.722 Rwanda 6.2 3.2 5.1 2.0 9.0 9.223 SierraLeone a a 3.1 -2.5 -1.0 -7.124 Benin 0.7 3.0 2.6 1.4 10.4 -12.725 CentralAfricanRep. -1.1 -3.1 4.2 1.6 -5.4 14.6

26 Kenya 10.6 0.8 5.7 3.1 7.2 -2.327 Sudan 0.2 -1.6 4.3 -1.4 6.4 -4.028 Pakistan 4.7 8.6 4.8 4.9 2.4 7.429 Haiti 1.9 -0.7 2.3 -0.2 14.8 -3.630 Lesotho 12.3 . . 8.6 . . 17.3

31 Nigeria 13.9 -3.6 5.0 0.0 14.7 -14.832 Ghana 3.8 -1.6 1.4 1.7 -1.3 3.233 SriLanka 1.1 8.4 4.0 6.3 11.5 -5.134 Yemen, PDR .. .. ..35 Mauritania 10.0 -6.2 1.9 4.7 19.2 -5.536 Indonesia 11.4 4.1 5.9 4.9 16.1 4.137 Liberia 3.4 1.3 3.2 0.8 6.4 -16.738 Afghanistan39 Burma40 Guinea41 Kampuchea, Dem.42 VietNam

Middle-income economies 7.7w 2.5w 6.7w 2.4w 8.6w -1.6wLower-middle-income 7.4w 3.0w 5.2w 1.7w 7.1 w -3.7w

43 Senegal 2.9 1.5 1.8 2.2 3.9 1.144 Bolivia 8.2 -5.2 4.1 0.6 4.4 -19.545 Zimbabwe 10.6 7.1 5.1 -2.7 0.9 -1.446 Philippines 7.7 -0.2 5.0 1.7 8.5 -14.647 Yemen Arab Rep. 3.7 3.8 -10.048 Morocco 11.0 4.3 4.5 2.7 11.1 -2.249 Egypt, Arab Rep. a 5.3 5.5 5.0 11.3 2.750 PapuaNewGuinea 0.1 -0.9 4.1 1.8 1.4 -3.451 Dominican Rep. 0.3 . . 7.1 . . 13.552 Côted'Ivoire 13.2 -5.7 7.5 3.5 10.7 -14.253 Honduras 6.9 2.8 4.9 1.1 6.8 -0.154 Nicaragua 6.6 16.0 2.0 -8.1 . . 4.055 Thailand 9.5 5.6 6.2 4.0 8.0 3.956 ElSalvador 7.0 3.2 4.1 -0.7 6.6 0.157 Congo,People'sRep. 5.5 7.1 1.4 6.7 4.5 -3.858 Jamaica 9.8 -1.5 2.0 2.4 -3.3 -1.259 Guatemala 6.2 1.5 5.1 -0.5 7.4 -5.460 Camemon 5.0 10.0 4.2 5.7 9.9 3.361 Paraguay 5.1 2.6 6.4 2.1 13.9 -4.362 Ecuador 12.2 -2.5 6.8 1.7 9.5 -4.763 Botswana 12.0 13.8 9.2 4.4 21.0 -1.564 Tunisia 7.2 4.7 8.3 3.7 4.6 -3.865 Turkey 6.1 3.8 5.7 5.6 8.8 4.866 Colombia 6.7 3.0 5.9 2.4 5.8 -0.467 Chile 4.0 -0.8 0.9 -0.4 0.5 -3.6

a. General government consumption figures are not available separately; they are included in private consumption. etc.

179

Average annual growth rate (percent)

General governmentconsumption Private consumption, etc.

Grossdomestic investment

1965-80 1980-87 1965-80 1980-87 1965-80 1980-87

68 Pens 6.3 0.5 4.9 2.0 0.3 -5.269 Mauritius 7.1 2.2 4.4 3.2 8.3 10.870 Jonian . 5.3 . . 7.3 . . -4.371 CostaRica 6.8 -0.8 5.2 3.3 9.4 2.172 SyrianArabRep. 15.1 -0.6 11.9 -0.8 13.9 -0.4

73 Malaysia 8.5 2.3 5.9 0.1 10.4 -1.074 Mexico 8.5 3.2 5.8 -0.1 8.5 -7.975 South Africa 5.3 3.7 3.3 1.5 4.1 -7.376 Poland77 Lebanon

Upper-middle-income 8.0w 2.1w 8.3w 3.1w 9.9w 0.1w

78 Brazil 6.9 3.1 9.0 3.1 11.3 -0.979 Uruguay 3.2 1.1 2.4 -1.9 8.0 -12.580 Hungary a 0.9 3.6 1.7 7.0 -1.881 Panama 7.4 3.5 4.6 4.3 5.9 -3.282 Argentina 3.2 1.3 3.0 0.4 4.6 -9.583 Yugoslavia 3.6 0.6 7.9 0.4 6.5 -0.284 Algeria 8.6 2.8 11.4 4.4 15.9 0.685 Korea, Rep. 7.7 5.5 7.8 5.5 15.9 10.086 Gabon 10.7 4.7 6.2 -2.2 14.1 -3.087 Portugal 8.1 2.3 7.1 1.2 4.6 -3.8

88 Venezuela . . 0.4 . . 0.3 . . -4.789 Greece 6.6 2.6 4.9 3.2 5.3 -4.590 TrinidadandTobago 8.9 -3.5 6.7 -8.8 12.1 -15.891 Libya 19.7 . . 19.1 . . 7.392 Oman a 13.6 18.4

93 Iran, Islamic Rep. 14.6 10.1 . . 11.594 Iraq95 Romania

Low- and middle-income 7.4 w 3.1 w 5.7 w 3.0w 8.6 w 3.0wSub-Saharan Africa 8.3w -lOw 3.9w 1.1 w 9.3w -8.3wEast Asia 6.9w 4.6w 5.9w 5.2w 11.3w 12.1wSouth Asia 5.8 w 8.6w 3.0 w 4.9 w 4.6 w 3.7wEurope, M.East, & N.Africa 9.4 w .. .. .. 9.0 wLatin America & Caribbean 6.5 w 2.1 w 6.4w 1.3 w 8.3 w 4.5 w

17 highly indebted 6.9w 1.3w 6.3w 1.3 w 8.6w -5.1wHigh-income economies 2.7w 2.7w 3.9w 3.0w 3.4w 3.1 w

OECD members 2.7w 2.7w 3.8w 3.0w 3.3 w 3.1 wfOther 14.3 w

96 Spain 5.1 4.4 4.8 1.3 3.7 1.797 Ireland 6.1 0.7 4.3 -0.8 6.3 -2.198 tSaudi Arabia a . . 20.0 . . 27.599 tlsmel 8.8 -1.2 6.0 3.8 5.9

100 NewZealand 3.4 1.7 2.3 1.5 2.2 5.5

101 tSingapore 10.2 9.1 8.0 3.9 13.3 3.2102 tHong Kong 7.7 5.6 9.0 6.9 8.6 1.3103 Italy 3.4 3.0 4.1 2.2 3.4 1.3104 United Kingdom 2.3 0.9 2.2 3.2 0.6 5.3105 Australia 5.0 3.7 4.1 3.2 2.8 0.8

106 Belgium 4.6 0.3 4.3 1.2 2.9 -0.8107 Netherlands 2.9 0.9 4.8 1.0 1.8 2.6108 Austria 3.7 1.8 4.4 2.0 4.5 1.8109 France 3.6 2.5 4.7 2.1 3.9 -0.4110 Geimany, Fed. Rep. 3.5 1.4 4.0 1.2 1.7 0.5

Ill Fitiland 5.3 3.7 3.8 4.5 2.9 0.8112 tKuwait a 3.9 11.1 0.8 11.9 -2.3113 Denmark 4.8 1.3 2.3 2.5 1.2 6.2114 Canada 4.8 1.9 4.9 2.9 5.1 3.3115 Sweden 4.0 1.5 2.5 1.5 0.9 1.8

116 Japan 5.1 2.9 6.0 2.9 6.7 3.9117 tUnited Arab Emirates .. .. ..118 Norway 5.5 3.6 3.9 3.6 4.2 2.6119 United States 1.2 3.6 3.1 4.1 2.6 5.0120 Switzerland 2.7 2.4 2.5 1.3 0.8 4.2

Total reporting economies 3.3w 2.7w 4.2w 3.0w 4.4w 3.1wOilexporters 11.1w 7.2w 1.9w 11.5w -1.0w

Nonreporting nonmembers

Table 9. Structure of demand

Distribution of gross domestic product (percent)

General Esportsof goodsgovernment Private Gross domestic Gross domestic and nonfactor Resource

consumption consumption, etc. investment savings services balance

180

Note: For data comparability and coverage, see the technical notes. Figures in italicu are for years other than those specified.

1965 1987 1965 1987 1965 1987 1965 1987 1965 1987 1965 1987

Low-income economies 12w 13w 69w 61w 20w 28w 19w 26w 8w 13w 1w 2wChina and India 13w 13w 66w 56w 22w 31w 21w 31w 4w lOw 1w 1wOther low-income 9w 12w 77w 73w 15w 19w 12w 15w 17w 20w 3w 5w

I Ethiopia 11 19 77 77 13 14 12 3 12 11 1 112 Bhutan3 Chad 20 8 74 104 12 18 6 12 19 17 6 314 Zaire 9 17 61 73 14 13 30 10 36 33 15 35 Bangladesh 9 8 83 90 11 11 8 2 10 6 4 96 Malawi 16 18 84 70 14 14 0 12 19 24 14 27 Nepal a 11 100 78 6 21 0 11 8 13 6 108 LaoPDR9 Mozambique 20 90 22 10 11 32

10 Tanzania 10 8 74 98 15 17 16 6 26 13 1 2311 BurkinaFaso 9 25 87 74 12 24 4 1 9 17 8 2312 Madagascar 23 14 74 79 10 14 4 7 16 20 6 713 Mali 10 10 84 90 18 16 5 0 12 17 13 1714 Burundi 7 17 89 76 6 20 4 8 10 9 2 1215 Zambia 15 25 45 55 25 15 40 20 49 47 15 5

16 Niger 6 12 90 84 8 9 3 5 9 19 5 517 Uganda 10 7 78 88 11 12 12 5 26 10 1 718 China 15 13 59 49 25 38 25 38 4 13 1 019 Somalia 8 11 84 89 11 35 8 1 17 11 3 3420 Togo 8 21 76 74 22 17 17 6 20 31 6 1221 India 10 13 74 65 18 24 16 22 4 7 2 222 Rwanda 14 12 81 83 10 17 5 5 12 8 5 1223 SierraLeone 8 7 83 83 12 9 9 10 30 9 3 1

24 Benin 11 10 87 86 11 14 3 4 13 15 8 1025 CentralAfricanRep. 22 13 67 89 21 14 Il 2 27 17 1626 Kenya 15 19 70 61 14 25 15 20 31 21 1 527 Sudan 12 15 79 79 10 Ii 9 6 15 8 528 Pakistan 11 13 76 77 21 17 13 II 8 13 8 629 Haiti 8 10 90 85 7 12 2 5 13 12 5 830 Lesotho 18 16 109 158 11 25 26 73 16 10 38 9931 Nigeria 5 11 83 69 14 16 12 20 13 31 2 432 Ghana 14 9 77 87 18 II 8 4 17 20 10 633 SriLanka 13 10 74 77 12 23 13 13 38 25 1 1134 Yemen,PDR .. .. .. .. .. .. .. ..35 Mauritania 19 13 54 73 14 20 27 14 42 50 13 736 Indonesia 5 10 87 61 8 26 8 29 5 26 0 337 Liberia 12 17 61 65 17 10 27 18 50 43 10 938 Afghanistan a 99 11 1 11 1039 Burma40 Guinea

41 Kampuchea, Dem. 16 71 13 12 1242 VietNam

Middle-income economies 11w 14w 67w 62w 21w 23w 21w 25w 17w 22w Ow 3wLower-middle-income lOw 13w 71w 68w 20w 21w 18w 21w 17w 22w 2w Ow

43 Senegal 17 17 75 77 12 13 8 6 24 28 4 744 Bolivia 9 14 74 84 22 9 17 2 21 14 5 845 Zimbabwe 12 20 65 59 15 18 23 22 27 8 3

46 Philippines 9 8 70 76 21 15 21 16 17 23 0 1

47 YemenArabRep. 18 94 15 12 4 2648 Morucco 12 18 76 68 10 19 12 14 18 25 1 549 Egypt,ArabRep. 19 14 67 77 18 19 14 8 18 15 4 1150 Papua New Guinea 34 22 64 62 22 22 2 17 18 44 20 5

51 DominicanRep. 19 75 10 6 16 452 Côted'Ivoire 11 17 61 65 22 13 29 19 37 34 7 6

53 Honduras 10 16 75 71 15 15 15 13 27 24 0 354 Nicaragua 8 74 21 18 29 355 Thailand 10 12 72 62 20 26 19 26 16 30 056 ElSalvador 9 11 79 81 15 14 12 8 27 19 2 657 Congo,People'sRep. 14 21 80 58 22 24 5 21 36 43 17 258 Jamaica 8 15 69 62 27 23 23 23 33 55 4 059 Guatemala 7 8 82 85 13 14 10 7 17 16 3 660 Cameroon 13 11 75 74 13 18 12 15 24 16 1 461 Paraguay 7 6 79 76 15 25 14 18 15 22 1 762 Ecuador 9 12 80 71 14 23 11 17 16 23 3 763 Botswana 24 89 6 13 32 1964 Tunisia 15 16 71 64 28 21 14 20 19 35 13 165 Turkey 12 9 74 67 15 26 13 23 6 21 266 Colombia 8 10 75 65 16 19 17 26 11 19 1 767 Chile 11 11 73 68 15 17 16 21 14 34 1 4

Nonreporting nonmembers

Distribution of gross domestic product (percent)

General Exports ofgoodsgovernment Private Gross domestic Gross domestic and nonfactor Resource

consumption consumption, etc. investment savings services balance

Total reporting economiesOil exporters

15w 17w 64w 61w 20w 21w 20w 22w 12w 19w Ow Ow11w 18w 66w 59w 20w 24w 24w 23w 23w 21w 5w Ow

a. General government conuumption figuieu are not available uepaiately; they are included in private con.rumption, etc.

181

1965 1987 1965 1987 1965 1987 1965 1987 1965 1987 1965 1987

68 Peni 10 11 59 67 34 25 31 23 16 9 3 269 Mauritius 13 11 74 60 17 26 13 29 36 69 4 370 Jordan . . 27 . . 76 . . 26 . . 3 . . 45 . . 3071 Costa Rica 13 15 78 67 20 21 9 18 23 34 10 372 SyrianArabRep. 14 18 76 72 10 19 10 10 17 15 0 973 Malaysia 15 16 61 47 20 23 24 37 42 64 4 1474 Mexico 6 10 75 73 20 15 19 17 8 7 2 275 SouthAfrica 11 19 62 53 28 20 27 28 26 29 0 876 Poland .. a . . 70 . . 29 . . 30 . . 18 . . 277 Lebanon 10 81 22 . . 9 36 13

Upper-middle-income 12 w 14 w 63 w 60 w 23 w 25 w 24 w 27 w 17 w 22 w 2 w 2 w

78 Brazil 11 12 67 65 20 20 22 23 8 9 2 3

79 Uruguay 15 13 68 76 II 9 18 11 19 21 7 280 Hungary a 10 75 63 26 27 25 26 . . 38 081 Panama 11 . . 73 . . 18 . . 16 . . 36 . . 282 Argentina 8 6 69 84 19 10 22 10 8 10 3 0

83 Yugoslavia 18 14 52 47 30 39 30 40 22 24 084 Algeria 15 16 66 55 22 29 19 29 22 14 3 085 Korea, Rep. 9 11 83 52 15 29 8 38 9 45 7 886 Gabon 11 23 52 43 31 31 37 34 43 41 6 387 Portugal 12 14 68 68 25 24 20 18 27 34 -5 -688 Venezuela 10 10 56 65 25 24 34 25 26 22 989 Greece 12 20 73 72 26 17 15 8 9 21 990 TrinidadandTobago 12 19 67 62 26 22 21 18 65 33 5 491 Libya 14 . . 36 29 50 53 2192 Oman

93 Iran, Islamic Rep. 13 63 . . 17 24 20 694 Iraq 20 50 16 31 . . 38 1595 Romania

Low- and middle-income 11w 13w 68 w 63 w 21 w 24 w 20 w 25 w 13w 20 w 1w 1wSub-Saharan AfricaEast AsiaSouth Asia

10 w14w9w

15w13 w12 w

73 w63 w76 w

72 w53 w68 w

14 w23 w18 w

16 w30 w22 w

14 w23 w15 w

13 w35 w19w

23 w8w6w

25 w31 w8w

1wOw

3 w

4 w5w

3wEurope, M.East, & N.Africa 13w 64 w 22 w 20 w 20 wLatin America & Caribbean 9w 11w 69 w 69 w 20 w 18 w 21w 20 w 13w 12w 1w 1w

l7highlyindebted lOw 11w 68w 68w 21w 19w 22w 21w 13w 14w 1w 2w

High-income economies 17 w 18 w 63 w 61 w 20w 21 w 21 w 21 w 12 w 19w 1 w 0 wOECD members 17 w 18w 63 w 61 w 20w 21 w 20w 21 w 12 w 18 w 1 w 0 w

tOther 14 w 27 w 49 w 49 w 24 w 25 w 34 w 24 w 52 w 57 w 10 w 0 w

96 Spain 8 14 68 64 28 22 24 22 10 20 3 097 Ireland 15 18 68 55 26 23 17 27 35 59 9 698 tSaudi Arabia 18 38 34 44 14 27 48 17 60 32 34 1099 tlsrael 20 31 65 58 29 17 15 11 19 38 13 6

100 New Zealand 13 15 62 56 26 29 26 29 22 26 1 0

101 tSingapore 10 12 80 48 22 39 10 40 123 . . 12 0102 tHongKong 7 7 64 62 36 25 29 31 71 124 7 5103 Italy 14 17 63 62 23 21 24 21 13 18 1 0104 UnitedKingdom 16 21 63 62 21 18 20 18 18 26 1105 Australia 13 18 69 60 20 23 18 22 15 16 2 1

106 Belgium 13 16 64 65 23 16 23 19 36 63 0 3107 Netherlands 15 16 70 61 16 21 15 23 43 52 1 3108 Austria 13 19 57 56 30 24 30 25 25 35 1109 France 16 19 57 61 26 20 27 20 13 21 1 0110 Germany,Fed.Rep. 15 20 67 55 18 20 18 25 19 32 0 6

111 Finland 14 21 58 57 30 22 29 22 20 25 2 0112 tKuwait 13 . . 26 . . 16 . . 60 . . 68 . . 45113 Denmark 16 25 72 53 13 19 12 21 29 32 2 2114 Canada 14 20 60 58 26 21 26 22 19 26 0115 Sweden 18 27 72 52 11 18 10 21 22 33 3

116 Japan 8 10 64 57 27 30 28 34 11 13 1 4117 tUnited Arab Emirates . . 23 . . 36 . . 27 . . 41 . . 55 . . 14118 Norway 15 21 56 53 30 29 29 27 41 36 2119 UnitedStates 19 21 63 66 17 16 18 13 6 10 1 3

120 Switzerland 11 11 60 59 30 30 30 31 29 35 1 0

Table 10. Structure of consumption

Low-income economiesChina and IndiaOther low-income

Percentage share of total household conswnption (range ofyears, 1980-85)

Food Gross rents, frel Other consumptionand power Transport and OtherCereals Clothing

and and Fuel and Medicalcominunication

consumerTotal tubers footwear Total power care Education Total Motor cars Total durables

Middle-income economiesLower-middle-income

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years otherthan those specified.

182

1 Ethiopia 32 12 8 17 5 3 2 12 4 27 8

2 Bhutan3 Chad .. ..4 Zaire 55 15 10 11 3 3 1 6 0 14 35 Bangladesh 59 36 8 17 7 2 1 3 0 10 3

6 Malawi 55 28 5 12 2 3 4 7 2 15 3

7 Nepal 57 38 12 14 6 3 1 1 0 13 28 La0PDR9 Mozambique . . . . . . . . . . . . . . .

10 Tanzania 62 30 12 8 3 1 5 2 0 10 3

11 Burkina Faso . . . . . . . . .0 . . .

12 Madagascar 58 22 6 12 7 1 6 4 1 14 213 Mali 57 22 5 6 5 1 2 20 2 10 3

14 Bunindi . . . . . . . . . . . . . . . 0 0 0

15 Zambia 43 9 11 13 5 0 8 6 1 18 1

16 Niger17 Uganda18 China 1619 Somalia20 Togo21 India 52 18 11 10 3 3 4 7 0 13 3

22 Rwanda 29 10 11 15 6 4 4 9 4 28 923 SierraLeone 47 18 4 12 4 2 1 10 0 24 1

24 Benin 37 12 14 11 2 5 4 14 2 15 524 Central African Rep.

26 Kenya 42 18 8 13 3 0 2 9 1 26 627 Sudan 60 . 5 15 4 5 3 2 . . 11

28 Pakistan 54 17 9 15 6 3 3 1 0 15 529 Haiti30 Lesotho

31 Nigeria 52 18 7 10 2 3 4 4 1 20 632 Ghana 50 .. 13 11 , . 3 3 . . 1533 SriLanka 43 18 7 6 3 2 3 15 1 25 5

34 Yemen, PDR35 Mauritania . . .

36 Indonesia 48 21 7 13 7 2 4 4 0 22 537 Liberia38 Afghanistan . . . . . . . .

39 Burma .

40 Guinea41 Kampuchea,Dem.42 VietNam

43 Senegal 55 17 12 15 6 2 0 6 0 10 244 Bolivia 33 . . 9 12 1 5 7 12 . . 2245 Zimbabwe 43 9 11 13 5 0 8 6 1 1946 Philippines 51 21 4 19 5 2 4 4 2 16 247 Yemen Arab Rep. .

48 Monicco 44 15 9 6 1 7 5 10 1 18 449 Egypt, Arab Rep. of 36 7 4 5 1 14 11 3 1 26 250 Papua New Guinea . . . . . . . . . . . . . . . . . . . .

51 Dominican Rep. 46 13 3 15 5 8 3 4 0 21 8

52 Cbte d'Ivoire 40 14 10 5 1 9 4 10 3 23 3

53 Honduras 36 . . 8 20 8 5 3 2054 Nicaragua . . . . . . . . . . . . . . . .

55 Thailand 30 7 16 7 3 5 5 13 0 2456 ElSalvador 33 12 9 7 2 8 5 10 1 2857 Congo, People's Rep.

58 Jamaica 38 . . 4 16 7 3 . . 17 . 2259 Guatemala 36 10 10 14 5 13 4 3 0 20 560 Cameroon 24 8 7 17 3 11 9 12 1 21 361 Paraguay 30 6 12 21 4 2 3 10 1 22 3

62 Ecuador 31 . . 11 6c 1" 5 55 11d 31

63 Botswana 35 13 8 15 5 4 9 8 2 22 764 Tunisia 42 10 9 20 3 3 7 6 1 14 5

65 Turkey 40 8 15 13 7 4 1 5 . . 2266 Colombia 29 . . 6 13 2 7 5 13 . . 2767 Chile 29 7 8 13 2 5 6 11 0 29 5

Percentage share of total household consumption (range ofyears, 1980-85)

High-income economiesOECD members

f Other

Nonreporting nonmembers

a. Includes beveruges and tobacco. b. Refers to government expenditure. c. Excludes fuel. d. Includes fuel.

Total reporting economiesOil exporters

183

Food

Clothingand

footwear

Gross rents, freland power

Medicalcare Education

Transport andcommunication

Other consumption

Total

Cerealsand

tubers

Otherconsumer

Total durablesTotalFuel andpower Total Motor cars

68 Peru 35 8 7 15 3 4 6 10 0 24 769 Mauritius 20 4 8 10 3 13 5 12 1 33 570 Jordan 35 . . 5 6 . . 5 8 6 . . 3571 CostaRica 33 8 8 9 1 7 8 8 0 28 972 Syrian Arab Rep.

73 Malaysia 30 .. 5 9 5 8 16 . . 2774 Mexico 35 10 8 5 5 12 . . 2575 SouthAfrica76 Poland

2629

79

127

. ,

2

46

. .

7178

42

3434 9

77 Lebanon ,, . . .

Upper-middle-income

78 Brazil 35 9 10 11 2 6 5 8 1 27 879 Uruguay 31 7 7 12 2 6 4 13 0 27 580 Hungary 25 . . 9 10 5 5 7 9 2 35 881 Panama 38 7 3 II 3 8 9 7 0 24 682 Argentina 35 4 6 9 2 4 6 13 0 26 6

83 Yugoslavia 27 10 9 4 6 5 11 2 32 984 Algeria .. .. .. .. .. ..85 Korea, Rep. 35 14 6 11 5 5 9 9 . . 25 586 Gabon .. . . . . . .. . . . . .

87 Portugal 34 . , 10 8 3 6 5 13 3 24 7

88 Venezuela 38 4 8 . . 8 7 10 . 2589 Greece 30 . 8 12 3 6 5 13 2 26 590 Trinidad and Tobago91 Libya92 Oman

93 Iran, Islamic Rep. 37 10 9 23 2 6 5 6 1 14 594 Iraq95 Romania ..

96 Spain 24 3 / 16 3 7 5 13 3 28 697 Ireland 22 4 5 11 5 10 7 11 3 33 598 tSaudi Arabia . . . . . . . . . . . . . . .

99 ttsrael 26 . . 4 20 2 6 9 10 . . 25100 New Zealand 12 2 6 14 2 9 6 19 6 34 9

101 tSingapore 19 . . 8 11 . . 7 12 13 . . 30102 tHongKong 12 1 9 15 2 6 5 9 1 44 15103 Italy 19 2 8 14 4 10 7 11 3 31 7104 United Kingdom 12 2 6 17 4 8 6 14 4 36 7105 Australia 13 2 5 21 2 10 8 13 4 31 7

106 Belgium 15 2 6 17 7 10 9 11 3 31 7107 Netherlands 13 2 6 18 6 11 8 10 3 33 8108 Austria 16 2 9 17 5 10 8 15 3 26 7109 France 16 2 6 17 5 13 7 13 3 29 7110 Gemiany,Fed.Rep. 12 2 7 18 5 13 6 13 4 31 9

111 Finland 16 3 4 15 4 9 8 14 4 34 6112 tKuwait . . . . . . . . . . . . . . . . . . .113 Denmark 13 2 5 19 5 8 9 13 5 33 7114 Canada Il 2 6 21 4 5 12 14 5 32 8115 Sweden 13 2 5 19 4 11 8 11 2 32 7

116 Japan 16 4 6 17 3 10 8 9 1 34 6117 tUnited Arab Emirates .. .. .. .. .. .. .. .. ..118 Norway 15 2 6 14 5 10 8 14 6 32 7119 United States 13 2 6 18 4 14 8 14 5 27 7120 Switzerland 17 . . 4 17 6 15 . . 9 . . 38

Low- and middle-incomeSub-Saharan AfricaEast AsiaSouth AsiaEurope, M.East, & N.AfricaLatin America & Caribbean

17 highly indebted countries

Table 11. Central government expenditurePercentage of total erpendiiure

184

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Defense Education Health

Housing,amenities;

social securityand welfare a

Economicservices Other a

Totalexpenditure

(percentage ofGNP)

Overallsurplus/deficit

(percentage of GNI')

1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987Low-income economien . . . . . . . .

China and India . . . . . . . . . . . . . . . . . . . . . . . .

Other low-income .. 13.4w 20.2w . . 5.4w 3.4w . . 5.4w .. 30.0w . . .. 14.7w 21.6w -3.2 w -2.7w1 Ethiopia 14.3 . . 14.4 5.7 4.4 . . 22.9 . 38.3 . . 13.7 -1.42 Bhutan . . . . . . .. . . .. . . . . .. .. . . .. . . .3 Chad 24.6 . 14.8 . . 4.4 . . 1.7 . . 21.8 . . 32.7 . . 14.9 9.0 -2.7 -1134 Zaire 11.1 . . 15.2 . . 2.3 . . 2.0 . . 13.3 . . 56.1 . . 19.8 . -3.85 Bangladesh1' 5.1 10.0 14.8 10.6 5.0 5.0 9.8 9.8 39.3 27.9 25.9 36.7 9.4 12.2 -1.9 -116 Ma1awit 3.1 6.6 15.8 10.8 5.5 7.1 5.8 2.3 33.1 33.7 36.7 39.6 22.1 35.1 -6.2 -10.37 Nepal 7.2 6.2 7.2 12.1 4.7 5.0 0.7 6.8 57.2 48.5 23.0 21.5 8.5 18.3 -1.2 -7.58 LaoPDR9 Mozambique . . . . . . . . . . .. . . . . . . . . . . . . . . . . .

10 Tanzania 11.9 15.8 17.3 8.3 7.2 5.7 2.1 1.7 39.0 27.5 22.6 41.2 19.7 20.9 -5.0 -4.911 BurkinaFaso 11.5 17.3 20.6 19.0 8.2 5.8 6.6 3.4 15.5 7.7 37.6 46.8 11.1 16.3 0.3 1.612 Madagascar 3.6 . . 9.1 . . 4.2 . . 9.9 . . 40.5 . . 32.7 . . 20.8 . . -2.513 Mali . . . . . . . . . . . . . . . . . . . . . . 35.5 . . -10.014 Bunindi 10.3 . . 23.4 . . 6.0 . . 2.7 . . 33.9 . . 23.8 . . 19.9 . . 0.015 Zambia" 0.0 0.0 19.0 8.3 7.4 4.7 1.3 2.3 26.7 21.0 45.7 63.7 34.0 40.3 -13.8 -15.816 Niger .. .. .. .. .. .. .. .. .. .. .. .. ..17 Uganda 23.1 26.3 15.3 15.0 5.3 2.4 7.3 2.9 12.4 14.8 36.6 38.6 21.8 15.0 -8.1 -4.418 China . . .. . . . . . . . . . . . . . . . . . .

19 Somalia1' 23.3 . . 5.5 . . 7.2 . . 1.9 . . 21.6 . . 40.5 . . 13.5 . . 0.620 Togo . . 7.6 . . 13.1 . . 3.8 . . 9.9 . . 31.8 . . 33.8 . . 41.5 .. -5.021 India 26.2 21.5 2.3 2.7 1.5 1.9 3.2 5.7 19.9 21.5 46.9 46.8 11.1 18.1 -3.4 -8.122 Rwanda 25.6 . . 22.2 . . 5.7 . . 2.6 . . 22.0 . . 21.9 . . 12.5 . . -2.723 SierraLeone" 3.6 . . 15.5 5.3 .. 2.7 . . 24.6 .. 48.3 . . 23.9 13.7 -4.4 -8.924 Benin25 Central African Rep.

26 Kenya" 6.0 9.1 21.9 23.1 7.9 6.6 3.9 1.7 30.1 22.8 30.2 36.8 21.0 25.0 -3.9 -4.627 Sudan" 24.1 . . 9.3 . . 5.4 . . 1.4 . . 15.8 . . 44.1 . . 19.2 . . -0.828 Pakistan 39.9 29.5 1.2 2.6 1.1 0.9 3.2 8.7 21.4 34.5 33.2 23.8 16.9 21.4 -6.9 -8.229 Haiti . . . . . . . . . . . . . . . . . . . . . . . . 14.5 . . .30 Lesotho 0.0 9.6 22.4 15.5 7.4 6.9 6.0 1.5 21.6 25.5 42.7 41.1 14.5 24.3 3.5 -2.631 Nigeria1' 40.2 2.8 4.5 2.8 3.6 0.8 0.8 1.5 19.6 35.9 31.4 56.2 8.3 27.7 0.7 10.332 Ghana1' 7.9 6.5 20.1 23.9 6.3 8.3 4.1 7.3 15.1 15.7 46.6 38.3 19.5 14.1 -5.8 0.633 SriLanka 3.1 9.6 13.0 7.8 6.4 5.4 19.5 11.7 20.2 29.2 37.7 36.3 25.4 32.4 -5.3 -8.934 Yemen, PDR35 Mauritania

36 Indonesia 18.6 8.6 7.4 8.8 1.4 1.5 0.9 1.7 30.5 23.5 41.3 55.9 15.1 24.0 -2.5 -0.937 Liberia 5.3 8.9 15.2 16.2 9.8 7.1 3.5 1.9 25.8 27.6 40.5 38.2 16.7 24.8 1.1 -7.938 Afghanistan . . . . . . . . . . . . . . . . . . . . . . . . . . . .

39 Burma 31.6 18.8 15.0 11.7 6.1 Z7 7.5 8.4 20.1 35.1 19.7 18.2 20.0 16.3 7.3 -0.840 Guinea41 Ka,npuchea, Dem.42 VietNam

Middle-income economies 11.6w 11.8w 12.0w 11.6w 6.3w 5.1w 20.7w 18.9w 27.4w 21.0w 22.6w . . 21.4w 24.7w -3.2w -7.7wLower-middle-income 11.5 w . . 17.7w 13.1 w 5.8w 3.5w 15.9w 10.6 w 23.1 w 19.5w 26.1 w 47.6w 20.5 w 25.5w -4.6w -6.4w

43 Senegal . . . . . . . . . . . . . . . . . . . . . . 18.8 -2.844 Bolivia 18.8 . . 31.3 . . 6.3 . . 0.0 . . 12.5 . . 31.3 . . 9.6 . . -1.845 Zimbabwe . . 14.2 . . 20.3 . . 6.] . . 4.6 . . 41.4 . . 13.3 . . 40.3 . . -10.846 Philippinesb 10.9 9.2 16.3 18.0 3.2 5.5 4.3 3.8 17.6 50.5 47.7 12.9 13.4 13.5 -2.0 -5.047 YemenArabRep. 33.8 22.2 4.0 16.5 2.9 3.6 0.0 0.0 2.7 6.3 56.6 51.4 13.4 31.9 -2.2 -19.948 Monicco 12.3 14.5 19.2 16.9 4.8 2.9 8.4 6.9 25.6 26.2 29.7 32.6 22.8 35.0 -3.9 -9.349 Egypt,ArabRep. . . 19.5 . . 12.0 . . 2.5 . . 16.0 . . 10.0 . . 40.1 . . 45.5 . . -6.650 PapuaNewGuinea" . . 4.5 . . 16.4 . . 9.7 . . 1.5 .. 21.3 . . 46.7 . . 34.6 . . -3.351 DominicanRep. 8.5 . . 14.2 . . 11.7 . . 11.8 . . 35.4 . . 18.3 . . 20.0 15.3 -0.2 -2.052 Côte d'Ivoire . . . . . . . . . . . . . . . . . . . . .

53 Honduras 12.4 . . 22.3 . . 10.2 . . 8.7 . . 28.3 . . 18.1 . . 16.1 . . -2.954 Nicaragua 12.3 . . 16.6 . . 4.0 . . 16.4 . . 27.2 . . 23.4 . . 15.5 58.0 3.9 -16.355 Thailand 20.2 18.7 19.9 19.3 3.7 6.1 7.0 5.2 25.6 21.1 23.5 29.6 16.7 18.7 -4.2 -2.356 ElSalvador 6.6 26.8 21.4 17.1 10.9 7.4 7.6 4.7 14.4 13.8 39.0 30.2 12.8 12.4 -1.0 0.657 Congo, People's Rep.

58 Jamaica59 Guatemala 110 194 95 104 238 258 99 -2.260 Camemon 8.1 . . 12.7 . . 3.5 . . 11.9 . . 35.7 . . 28.0 . . 23.461 Paraguay 13.8 12.1 12.1 12.2 3.5 3.1 18.3 32.3 19.6 10.1 32.7 30.2 13.1 7.9 -1.7 1.562 Ecuador" 15.7 11.8 27.5 24.5 4.5 7.3 0.8 0.9 28.9 19.8 22.6 35.8 13.4 16.3 0.2 2.163 Botswanab 0.0 7.9 10.0 18.4 6.0 5.9 21.7 10.1 28.0 28.4 34.5 29.2 33.7 47.5 -23.8 28.264 Tunisia 4.9 . . 30.5 . . 7.4 . . 8.8 . . 23.3 . . 25.1 . . 23.1 . . -0.965 Turkey 15.5 11.4 18.1 12.6 3.2 2.4 3.1 3.5 42.0 23.6 18.1 46.6 22.7 22.8 -2.2 -4.266 Colombia . . . . . . . . . . . . . . . . . . . . . . . . 13.1 14.7 -2.5 -0.767 Chile 6.1 10.7 14.3 12.5 8.2 6.0 39.8 42.6 15.3 9.2 16.3 19.0 43.2 31.9 -13.0 0.1

Percentage of total expenditure

Defense Education Health

Housing,amenities;

social securityand welfare

Economicservices 0ther

Totalexpenditure

(percentage ofGNP)

Overallsurplus/deficit

(percentage of GNP)

1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987

68 Peru" 14.5 . 23.6 . . 5.5 . . 1.8 . . 30.9 .. 23.6 . . 16.1 14.7 -0.9 0.269 Mauritius 0.8 0.8 13.5 12.4 10.3 7.6 18.0 17.4 13.9 21.6 43.4 40.3 16.3 23.0 -1.2 0.270 Joitlan 33.5 30.3 9.4 13.8 3.8 4.2 10.5 10.1 26.6 18.1 16.2 23.6 52.3 44.6 -7.6 8.471 Costa Rica 2.8 2.2 28.3 16.2 3.8 19.3 26.7 26.7 21.8 12.3 16.7 23.3 18.9 28.3 -4.5 -4.872 SyrianArabRep. 37.2 38.9 11.3 9.4 1.4 1.4 3.6 6.7 39.9 22.6 6.7 21.0 28.8 37.1 -3.5 -10.9

73 Malaysia 18.5 . . 23.4 . . 6.8 . 4.4 . . 14.2 . . 32.7 . . 26.5 31.9 -9.4 -8.274 Mexico 4.2 1.4 16.4 8.7 5.1 1.3 25.0 8.5 34.2 12.0 15.2 68.2 11.5 22.7 -2.9 -9.575 South Africa .. . . 21.8 32.7 -4.2 -4.476 Poland . . 40.1 -1.777 Lebanon

Upper-middle-income 11.9w .. 7.7w .. 6.7w .. 24.5 w .. 28.2w .. 21.0w .. 22.3 w -1.8w -8.7w78 Brazil 8.3 . . 8.3 . . 6.7 . . 35.0 . . 23.3 . . 18.3 . . 17.4 26.1 -0.3 -13.379 Uruguay 5.6 10.2 9.5 7.1 1.6 4.8 52.3 49.5 9.8 8.3 21.2 20.1 25.0 23.9 -2.5 -0.780 Hungary . . 4.0 . . 2.3 . . 3.6 . . 26.2 . . 37.7 . . 26.1 . . 59.6 . . -3.681 Panama 0.0 0.0 20.7 15.9 15.1 15.5 10.8 14.0 24.2 8.1 29.1 46.5 27.6 34.6 -6.5 -4.282 Argentina 10.0 6.0 20.0 6.0 . . 1.9 20.0 32.7 30.0 18.1 20.0 35.3 19.6 . . -4.983 Yugoslavia 20.5 55.1 0.0 0.0 24.8 0.0 35.6 11.2 12.0 16.3 7.0 17.3 21.1 8.0 -0.4 0.084 Algeria .. .. .. .. .. .. .. .. .. .. .. .. ..85 Korea, Rep. 25.8 27.3 15.8 18.3 1.2 2.3 5.9 7.2 25.6 16.6 25.7 28.2 18.0 17.4 -3.9 0.586 Gabon .. . . . . 40.1 45.9 -12.9 0.187 Portugal .

88 Venezuela 10.3 5.8 18.6 19.6 11.7 10.0 9.2 11.7 25.4 17.3 24.8 35.6 18.1 22.0 -0.2 -2.189 Greece 14.9 . . 9.1 . . 7.4 . . 30.6 . . 26.4 . . 11.7 . . 27.5 50.9 -1.7 -14.490 TrinidadandTobago . . .

91 Libya .. .. .. .. .. .. .. .. .. .. .. .. ..92 Oman 39.3 43.9 3.7 11.3 5.9 4.8 3.0 1.2 24.4 17.1 23.6 21.8 62.1 47.4 -15.3 -5.293 Iran, Islamic Rep. 24.1 14.2 10.4 19.6 3.6 6.0 6.1 17.4 30.6 15.7 25.2 27.1 30.8 23.5 -4.6 -3.994 Iraq95 Romania 54 47 29 18 05 08 162 219 618 555 131 154

Low- and middle-income 13.2w 12.6w 12.2w 10.4w 5.9w 4.6w 18.1 w 16.6w . . 21.8w . . 18.0w 24.5w -3.5 w -7.7wSub-Saharan Africa .. ..East Asia . . . . . . . . . . . . . .

South Asia . . 19.9w . . 3.0w 2.1 w . . 6.8w . . 25.6w 42.6w . . 18.5w . . -8.5 wEurope,M.East,&N.Africa .. 14.9w . . 12.3w . . .. .. .. .. 26.6w .. 30.1w -4.3w -7.0wLatin America& Caribbean 7.3 w .. 13.5 w .. 6.8 w . . 29.1 w .. 23.4w .. 20.0w .. 16.9w .. -2.6w -10.2w

17 highly indebted 10.2w 7.0w 14.4w 9.6w 8.4w 5.9w 29.6w 23.8w 22.7w 21.2w .. .. 17.0w 20.1 w -2.7w -9.2wHigh-income economies 21.8w 14.9w . . 4.6w 11.1 w 12.5w 41.9w .. 13.0w 9.9w .. 25.7w 22.6w 28.7w -1.9w -4.3w

OECD members 21.7w 14.7w .. 4.5w 11.2w 12.6w 42.3 w .. 13.0w 9.9w .. 25.6w 22.2w 28.4w -1.8w -4.4wtOther . . .

96 Spain 6.5 5.6 8.3 5.5 0.9 /2.7 49.8 40.4 17.5 11.8 17.0 24.0 19.6 34.8 -0.5 -5.297 Ireland . . 3.1 .. 11.4 . . 13.0 .. 30.3 . . 13.9 . . 28.3 32.7 60.4 -5.5 -13.098 tSaudi Arabia . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

99 tlsrael 42.9 30.1 7.1 7.6 3.6 3.2 7.1 17.0 7.1 10.5 32.2 31.5 43.9 63.8 -15.7 0.8100 New Zealand" 5.8 4.7 16.9 11.1 14.8 12.4 25.6 29.7 16.5 9.2 20.4 32.9 30.3 47.1 -4.0 0.6

101 tSingapore 35.3 19.0 15.7 18.2 7.8 4.1 3.9 15.9 9.9 19.9 27.3 23.0 16.7 28.9 1.3 1.4102 tHong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

103 Italy 6.3 3.2 16.1 7.4 13.5 9.6 44.8 36.3 18.4 12.1 0.9 31.4 27.6 52.0 -8.1 -16.5104 UnitedKingdom 16.7 12.9 2.6 2.2 12.2 13.1 26.5 31.6 11.1 7.5 30.8 32.7 31.8 38.9 -2.7 -1.8105 Australia 14.2 9.3 4.2 7.0 7.0 9.5 20.3 28.6 14.4 7.2 39.9 38.4 20.2 28.8 0.3 -1.2106 Belgium 6.7 5.3 15.5 13.2 1.5 1.7 41.0 42.0 18.9 12.1 16.4 25.7 39.2 52.9 -4.3 -10.6107 Netherlands 6.8 5.0 15.2 11.9 12.1 11.0 38.1 38.8 9.1 11.0 18.7 22.3 41.0 57.7 0.0 -3.2108 Austria 3.3 2.8 10.2 9.7 10.1 12.5 53.8 46.7 11.2 12.0 11.4 16.4 29.6 40.3 -0.2 -5.3109 France . . 6.3 . . 7.8 . . 20.8 . . 38.5 . . . . . . 26.6 32.3 45.1 0.7 -0.8110 Germany, Fed. Rep. 12.4 . . 1.5 . . 17.5 . . 46.9 . . 11.3 . . 10.4 . . 24.2 30.1 0.7 -1.1111 Finland 6.1 5.3 15.3 13.6 10.6 10.5 28.4 36.7 27.9 20.6 11.6 13.3 24.3 31.9 1.2 -1.0112 IKuwait 8.4 14.0 15.0 14.2 5.5 7.6 14.2 21.9 16.6 21.2 40.1 21.0 34.4 36.9 17.4 23.5113 Denmark 7.3 5.2 16.0 8.6 10.0 1.3 41.6 40.3 11.3 7.7 13.7 37.0 32.6 39.8 2.7 -0.6114 Canada 7.6 8.1 3.5 3.5 7.6 6.3 35.3 36.3 19.5 12.6 26.5 33.2 20.1 24.2 -1.3 -4.1115 Sweden 12.5 6.6 14.8 8.9 3.6 1.2 44.3 50.8 10.6 9.2 14.3 23.3 27.9 42.9 -1.2 1.9

116 Japan" . . . . . . . . . . . . . . . . . . . . . . . . 12.7 17.4 -1.9 -4.9117 tUnitedArab Emirates" 24.4 . . 16.5 . . 4.3 . . 6.1 . . 18.3 . . 30.5 . . 4.0 . . 0.3118 Norway 9.7 8.3 9.9 8.7 12.3 10.5 39.9 36.0 20.2 19.9 8.0 16.6 35.0 40.6 -1.5 3.9119 UnitedStates 32.2 25.6 3.2 1.7 8.6 12.2 35.3 31.3 10.6 7.7 10.1 21.6 19.1 23.3 -1.5 3.3120 Switzerland 15.1 . . 4.2 . . 10.0 . . 39.5 . . 18.4 . . 12.8 . . 13.3 . . 0.9

Total reporting economies 20.6 w 14.4w . . 5.3w 10.3 w . . 38.3 w . . 14.7 w 11.4w 16.1 w 27.3w 22.1 w 28.5 w -2.1 w -4.8wOil exporters 14.9w 11.4w 14.5w 12.4w .. 4.9w .. 15.1w 30.5w 17.2w 25.0w 35.0w 22.0w 33.1w -0.4w -5.4w

Nonreporting nonmembers

a. See the technical notes. b. Refers to budgetary data.

185

Table 12. Central government current revenue

186

Percentage of total current revenue

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Tax revenue

Other taxes'Nontaxrevenue

Total currentrevenue

(percentageof GNP)

Taxes onincome

profit, andcapital gain

Socialsecurity

contributions

Domestictaxes

on goodsand services

Taxes oninternational

trade andtransactions

1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987

Low-income economies ..China and India . . . . . . . . . . . . . .Otherlow-income .. 29.0w .. .. 31.9w . . 20.7w .. .. 19.3w . . 17.8wI Ethiopia 23.0 . . 0.0 29.8 . . 30.4 5.6 . . 11.1 . . 10.52 Bhutan . . . . . . . . . . . . . . . . . . . . . . . . .3 Chad 16.7 20.8 0.0 0.0 12.3 8.6 45.2 46.2 20.5 12.7 5.3 11.6 10.8 5.74 Zaire 22.2 29.9 2.2 0.9 12.7 15.1 57.9 33.4 1.4 5.6 3.7 15.2 14.3 16.35 Bang1adesh' 3.7 9.8 0.0 0.0 22.4 28.4 18.0 42.6 3.8 2.7 52.2 16.6 8.6 9.56 Malawib 31.4 35.5 0.0 0.0 24.2 28.9 20.0 16.8 0.5 0.6 23.8 18.2 16.0 22.67 Nepal 4.1 8.0 0.0 0.0 26.5 40.7 36.7 27.7 19.0 6.2 13.7 17.4 5.2 8.68 LaoPDR9 Mozambique .. . . . . . . . . . . . . . . . . . . . . . . .

10 Tanzania 29.9 25.8 0.0 0.0 29.1 57.4 21.7 8.6 0.5 3.1 18.8 5.1 15.8 16.311 BurkinaFaso 16.8 20.6 0.0 4.5 18.0 22.7 51.8 39.4 3.2 6.8 10.2 10.5 11.4 15.312 Madagascar 13.1 . . 7.2 . . 29.9 . . 33.6 . . 5.5 . . 10.8 . . 18.313 Mali . . 8.2 . . 4.6 . . 22.2 . . 28.1 . . 26.9 . . 10.1 . . 15.114 Bunsndi 18.1 .. 1.2 . . 18.3 . . 40.3 . . 15.6 . . 6.5 . . 11.515 Zambia" 49.7 23.5 0.0 0.0 20.2 40.2 14.3 32.9 0.1 0.5 15.6 3.0 23.2 24.416 Niger .. .. .. .. .. .. .. .. .. .. ..17 Uganda 22.1 5.5 0.0 0.0 32.8 19.1 36.3 75.3 0.3 0.0 8.5 0.0 13.7 9.318 China . . . . . . . . . . . . . . . . . . . . .19 Somalia" 10.7 . . 0.0 . . 24.7 . . 45.3 . . 5.2 . . 14.0 . . 13.720 Togo .. 35.7 . . 6.3 . . 9.6 .. 32.3 . . 1.1 . . 22.2 .. 31.821 India 21.3 13.7 0.0 0.0 44.5 37.8 20.1 28.2 0.9 0.4 13.2 19.9 10.8 14.522 Rwanda 17.9 . . 4.4 . . 14.1 . . 41.7 . . 13.8 . . 8.1 . . 9.823 SierraLeoneb 32.7 28.0 0.0 0.0 14.6 10.3 42.4 24.7 0.3 1.0 9.9 5.6 19.5 6.524 Benin25 Central African Rep.26 Kenyab 35.6 30.4 0.0 0.0 19.9 38.0 24.3 19.2 1.4 1.5 18.8 10.9 18.0 20.827 Sudanb 11.8 . . 0.0 . . 30.4 . . 40.5 . . 1.5 . . 15.7 . . 18.028 Pakistan 13.6 10.8 0.0 0.0 35.9 33.4 34.2 32.9 0.5 0.2 15.8 22.7 12.5 16.729 Haiti . . 11.8 . . 0.0 . . 42.2 . . 21.4 . . 10.3 . . 14.3 . . 10.430 Lesotho 10.2 11.1 0.0 0.0 2.3 10.3 73.7 67.8 5.9 0.2 7.8 10.5 15.4 22.031 Nigeriab 43.0 39.9 0.0 0.0 26.3 5.1 17.5 6.6 0.2 14.5 13.0 62.9 9.4 18.532 Ghanab 18.4 21.5 0.0 0.0 29.4 25.3 40.6 42.5 0.2 0.1 11.5 10.6 15.1 14.533 SriLanka 19.1 11.7 0.0 0.0 34.7 37.2 35.4 30.8 2.1 3.7 8.7 16.6 20.0 21.534 Yemen, PDR35 Mauritania36 Indonesia 45.5 47.6 0.0 0.0 22.8 18.2 17.6 8.3 3.5 2.0 10.6 23.9 13.4 23.137 Liberia 40.4 34.1 0.0 0.0 20.3 32.0 31.6 26.9 3.1 2.5 4.6 4.4 17.0 17.038 Afghanistan . . . . . . . . . . . . . . . . . . . . .

39 Burma 28.7 4.8 0.0 0.0 34.2 40.0 13.4 15.9 0.0 0.0 23.8 39.340 Guinea41 Kampuchea,Dem.42 VietNam

Middle-income economies 20.6w 23.6w . . 22.7 w 27.5 w 14.1 w 10.0w 22.9w 20.1 w 19.6w 20.4wLower-middle-income 26.8w 29.4w . . 26.9w 33.6w 17.3 w 12.2w . . 15.0 w 18.2 w 16.9w 20.1 w

43 Senegal 17.5 . . 0.0 24.5 . . 30.9 . . 23.9 3.2 . . 16.944 Bolivia 15.4 . . 0.0 . . 30.8 . . 46.2 .. 7.7 .. 0.0 . . 7.845 Zimbabwe . . 42.8 . . 0.0 . . 30.6 . . 15.6 . . 1.1 . . 10.0 . . 28.946 Philippines"' 13.8 24.3 0.0 0.0 24.3 39.6 23.0 16.9 29.7 2.5 9.3 16.6 12.4 12.947 YemenArabRep. 6.1 13.4 0.0 0.0 10.3 13.3 56.5 29.4 9.6 15.1 17.5 28.8 8.0 16.1

48 Morocco 16.4 18.9 5.9 5.2 45.7 46.2 13.2 14.3 6.1 7.2 12.6 8.2 18.5 25.649 Egypt,ArabRep.' . 15.2 14.6 12.0 13.4 7.9 . . 37.0 . . 39.050 Papua New Guinea" . . 41.7 0.0 13.4 25.2 . . 2.0 . . 17.8 . . 23.551 Dominican Rep. 17.9 18.2 3.9 3.4 19.0 37.4 40.4 32.3 1.7 1.7 17.0 7.1 19.4 15.552 Côte d'Ivoire53 Honduras 19.2 . . 3.0 . . 33.8 . . 28.2 . . 2.3 . . 13.5 . . 13.254 Nicaragua 9.5 14.4 14.0 10.5 37.3 48.5 24.4 7.1 9.0 10.6 5.8 8.9 12.6 36.855 Thailand 12.1 18.2 0.0 0.0 46.3 50.0 28.7 20.0 1.8 2.2 11.2 9.7 12.5 16.256 ElSalvador 15.2 21.4 0.0 0.0 25.6 41.1 36.1 26.1 17.2 5.6 6.0 5.8 11.6 11.657 Congo, People's Rep. 19.4 . . 0.0 40.3 . . 26.5 6.3 7.5 . . 18.458 Jamaica . . . . . . . . . . . . . . . . . . . . .

59 Guatemala 12.7 . . 0.0 . . 36.1 . . 26.2 . . 15.6 . . 9.4 . . 8.960 Camemon . . 31.3 . . 5.4 . . 14.9 . . 18.7 . . 4.0 . . 25.8 . . 18.861 Paraguay 8.8 12.2 10.4 12.7 26.1 26.1 24.8 11.4 17.0 22.5 12.9 15.1 11.5 9.662 Ecuadoi 19.6 65.0 0.0 0.0 19.1 13.7 52.4 17.3 5.1 2.0 3.8 2.0 13.6 18.563 Botswana" 19.9 38.1 0.0 0.0 2.4 1.2 47.2 13.4 0.4 0.1 30.0 47.2 30.7 75.264 Tunisia 15.9 . . 7.1 . . 31.6 . . 21.8 . . 7.8 . . 15.7 . . 23.665 Turkey 30.8 42.6 0.0 0.0 31.0 33.2 14.6 7.4 6.1 4.1 17.5 12.7 20.6 18.566 Colombia 37.1 27.0 13.7 8.6 15.2 27.7 19.8 19.1 7.1 6.2 7.1 11.5 10.6 13.867 Chile 14.3 14.0 28.6 6.7 28.6 42.5 14.3 10.1 0.0 6.7 14.3 20.0 30.2 30.9

a. See the technical notes. b. Refers to budgetaiy data.

Percentage of total current revenue

187

Tax revenue

Other taxes'Nontaxrevenue

Total currentrevenue

(percentageof GNP)

Taxes onincome

profit, andcapital gain

Socialsecurity

contributions

Domestictaxes

on goodsand services

Taxes on

internationaltrade and

transactions

1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987 1972 1987

68 Peru" 17.3 24.3 0.0 0.0 32.7 56.7 15.4 22.6 21.2 1.2 13.5 4.3 15.2 11.969 Mauritius 22.7 10.0 0.0 4.3 23.3 18.3 40.2 50.5 5.5 4.2 8.2 12.8 15.6 23.370 Jordan 9.0 10.2 0.0 0.0 14.9 13.5 34.7 27.8 7.1 10.7 34.2 37.9 26.6 30.771 Costa Rica 17.7 10.8 13.4 24.7 38.1 28.2 18.1 21.1 1.6 -0.2 11.0 15.5 15.7 23.772 Syrian Arab Rep. 6.8 24.7 0.0 0.0 10.4 8.9 17.3 7.2 12.1 12.2 53.4 47.0 25.1 24.2

73 Malaysia 25.2 33.7 0.1 0.8 24.2 18.6 27.9 17.6 1.4 2.1 21.2 27.2 20.3 24.874 Mexico 36.4 26.8 19.4 9.3 32.1 64.7 13.2 6.2 -9.8 -16.3 8.6 9.3 9.9 13.375 SouthAfrica 54.8 52.7 1.2 1.2 21.5 31.8 4.6 2.9 5.0 2.8 12.8 8.6 21.2 29.276 Poland . . 27.5 . . 25.8 . . 29.9 6.7 4.0 . . 6.2 . . 38.777 Lebanon .

Upper-middle-income 16.0w 20.1 w 19.6 w 24.8w 11.2 w 8.3w 28.4w 21.2w 22.2 w 20.2w78 Brazil 20.0 20.8 27.7 27.7 35.4 20.5 7.7 2.3 3.1 5.3 6.2 23.4 18.9 22.179 Uruguay 4.7 8.2 30.0 27.3 24.5 43.6 6.1 13.7 22.0 2.5 12.6 4.7 22.7 23.680 Hungary . . 18.0 . . 24.2 . . 31.5 . . 6.5 . . 11.1 . . 8.8 . . 55.381 Panama 23.3 23.7 22.4 16.2 13.2 16.0 16.0 12.1 7.7 3.4 17.3 28.6 21.8 29.782 Argentina 0.0 6.2 33.3 25.2 0.0 37.4 33.3 12.0 0.0 19.2 33.3 9.4 14.7 21.6

83 Yugoslavia 0.0 0.0 52.3 0.0 24.5 60.1 19.5 38.4 0.0 0.0 3.7 1.5 20.7 8.184 Algeria . . . . . . . . . . . . . . . . . . . . . . .

85 Korea, Rep. 28.6 28.6 0.7 1.7 41.3 39.1 10.6 17.3 6.3 3.4 12.4 9.8 13.3 19.086 Gabon 18.2 44.2 6.0 0.0 9.5 6.5 44.9 16.2 4.2 1.9 17.2 31.2 28.3 47.187 Portugal

88 Venezuela 54.2 43.0 6.0 4.2 6.7 8.8 6.1 23.4 1.1 2.3 25.9 18.2 18.5 22.789 Greece 12.2 1Z9 24.5 34.9 35.5 36.3 6.7 0.5 12.0 0.2 9.2 10.2 25.4 35.890 Trinidad and Tobago91 Libya .. .. .. .. .. .. .. .. .. .. ..92 Oman 71.1 20.9 0.0 0.0 0.0 0.8 3.0 2.3 2.3 0.6 23.6 75.4 47.4 42.2

93 Iran, Islamic Rep. 7.9 21.4 2.7 14.3 6.4 11.1 14.6 12.4 4.9 8,1 63.6 32.7 26.294 Iraq .. .. .. .. .. .. ..95 Romania 6.0 0.0 8.2 16.5 0.0 0.0 0.0 0.0 0.0 12.3 85.8 71.2

Low- and middle-income 20.2 w 22.3 w 25.6w 28.6w 15.7w 12.6w 21.7w 20.4w 16.1 w 20.2wSub-Saharan AfricaEast AsiaSouth Asia . . 13.4 w 34.9w .. 29.1w 22.2w 14.7wEurope, M.East, & N.AfricaLatin America & Caribbean 23.3 w 23.2 w 25.2w 29.4w 14.4w 8.7w 13.6w 17.5w 16.1 w 19.6w

17 highly indebted 18.3w 20.0w 28.1 w 32.1 w 13.9w 9.8w . . . . 12.4 w 17.0w 16.1 w 18.7w

High-income economies 44.0w 38.9w 23.3w 19.8w 2.3 w 1.2 w . . 6.5 w 9.3w 21.9w 24.4wOECD members 44.3 w 39.2 w 23.5w 19.9w 2.2 w 1.2w 6.2w 8.6w 21.6w 24.1 w

tOther

96 Spain 15.9 22.6 38.9 38.2 23.4 27.7 10.0 2.7 0.7 1.3 11.1 7.5 19.7 29.597 Ireland 28.3 34.2 9.0 13.3 32.1 31.7 16.7 7.6 3.2 3.0 10.6 10.2 30.1 48.398 tSaudi Arabia . . . . . . . . . . . . . . . . . . . . . . . . .

99 tlsrael 40.0 34.6 0.0 6.0 20.0 29.5 20.0 4.6 10.0 6.4 10.0 18.9 31.3 55.2100 NewZealand" 61.4 51.4 0.0 0.0 19.9 26.3 4.1 2.8 4.5 2.0 10.0 17.5 29.1 44.7

101 Singapore 24.4 20.9 0.0 0.0 17.6 13.9 11.1 3.! 15.5 12.2 31.4 50.0 21.5 26.3102 Hong Kong . . . . . . . . . . . . . . . . . . .

103 Italy 16.6 37.7 39.2 40.5 31.7 23.4 0.4 0.0 4.3 -4.1 7.7 2.4 23.3 36.1104 UnitedKingdom 39.4 45.1 15.6 22.2 27.1 30.4 1.7 0.1 5.4 2.2 10.8 9.9 32.5 37.3105 Australia 58.3 61.6 0.0 0.0 21.9 22.1 5.2 4.6 2.1 0.5 12.5 11.2 22.1 27.7

106 Belgium 31.3 38.1 32.4 35.0 28.9 21.0 1.0 0.0 3.3 2.3 3.1 3.6 35.0 43.5107 Netherlands 32.5 25.7 36.7 39.9 22.3 21.9 0.5 0.0 3.4 2.5 4.7 10.1 43.4 51.5108 Austria 20.7 18.4 30.0 37.1 28.3 26.8 5.4 1.5 10.2 7.5 5.5 8.7 29.7 34.8109 France 16.9 17.8 37.1 45.6 37.9 27.6 0.3 0.0 2.9 0.9 4.9 8.1 33.4 42.5110 Germany, Fed. Rep. 19.7 17.4 46.6 53.8 28.1 22.5 0.8 0.0 0.8 0.2 4.0 6.1 25.3 29.2

111 Finland 30.0 32.5 7.8 10.4 47.7 43.5 3.1 0.8 5.8 3.8 5.5 9.1 26.5 31.6112 tKuwait 68.8 0.4 0.0 0.0 19.7 0.0 1.5 1.3 0.2 0.0 9.9 97.7 55.2 66.1113 Denmark 40.0 37.8 5.1 4.4 42.1 41.2 3.1 0.1 2.8 4.1 6.8 12.4 35.5 43.5114 Canada 41.2 51.1 6.2 14.6 14.5 17.9 5.2 4.2 -0.6 0.0 10.9 12.2 21.1 20.1115 Sweden 27.0 17.6 21.6 28.5 34.0 27.9 1.5 0.5 4.7 11.0 11.3 14.5 32.4 44.2

116 Japan" . . . . . . . . . . . . . . . . 11.2 12.6117 tUnited Arab Emirates" 0.0 . . 0.0 .. 0.0 . . 0.0 . . 0.0 . . 100.0 .. 0.2118 Norway 22.6 20.2 20.6 21.8 48.0 39.7 1.6 0.5 1.0 1.0 6.2 16.7 36.8 48.4119 UnitedStates 59.4 52.4 23.6 32.8 7.1 3.5 1.6 1.7 2.5 0.8 5.7 8.8 17.6 20.1120 Switzerland 13.9 . . 37.3 . . 21.5 . . 16.7 . . 2.6 8.0 . . 14.5

Total reporting economies 40.3w 36.2w 23.4w 20.9w 4.0w 2.8w 8.1 w 10.8w 21.2 w 24.0 aOil exporters 26.3 w 23.4w 24.2w 23.8w 10.8 w 8.1 w .. 32.0w 20.1 w 27.1 a

Nonreporting nonmembers

Table 13. Money and interest rates

188

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Monetary holdings broadly definedAverage

annualinflation

(GDP deflator)

Nominal interest rates of banks(average annual percentage)

Average annualnominal growth Average outstandingrate (percent) (percentage of GDP) Deposit rate Lending rate

1965-80 1980-87 1965 1980 1987 1980-87 1980 1987 1980 1987

Low-income economiesChina and IndiaOther low-income

1 Ethiopia 12.7 12.2 12.5 25.3 41.4 2.6 1.00 6.002 Bhutan . . 26.5 8.43 Chad 12.5 17.4 9.3 20.0 25.3 5.3 s.so 5. ii. io.504 Zaire 28.2 53.9 11.1 8.9 8.8 53.55 Bangladesh 21.6 18.6 25.2 11.1 8.25 11.336 Malawi 15.4 17.7 17.6 20.3 25.0 12.4 7.92 14.25 16.67 19.507 Nepal 17.9 18.9 8.4 21.9 29.5 . . 4.00 8.50 14.00 15.008 LaoPDR 8.1 46.59 Mozambique 26.9 ..

10 Tanzania 19.7 19.8 37.2 25.9 24.9 4.00 15.75 11.50 27.5011 BurkinaFaso 17.1 12.6 9.3 18.5 23.1 4.4 6.19 5.25 9.38 8.0012 Madagascar 11.9 15.4 19.6 27.6 25.7 17.4 5.63 11.50 9.50 14.5013 Mali 14.4 13.7 17.9 22.5 4.2 6.19 5.25 9.38 8.0014 Bumndi 15.7 10.3 1011 13.3 15.6 7.5 2.50 5.33 12.00 12.0015 Zambia 12.7 28.9 32.6 30.6 28.7 7.00 13.23 9.50 21.2016 Niger 18.3 6.1 3.8 13.3 18.1 4.1 6.19 5.25 9.38 8.0017 Uganda 23.1 77.8 12.7 7.8 95.2 6.80 30.00 10.80 34.6718 China . . 25.9 . . 34.9 65.5 4.2 5.4019 Somalia 20.4 37.2 12.7 17.9 16.1 37.8 4.50 15..i 7.50 22.0020 Togo 20.3 11.2 10.9 29.0 44.5 6.6 6.19 5.25 9.38 8.0021 India 15.3 17.0 25.7 36.2 45.4 7.7 16.50 16.5022 Rwanda 19.0 10.4 15.8 13.6 16.7 4.5 6.25 6.25 13.50 13.0023 Sierra Leone 15.9 47.8 11.7 20.6 10.3 50.0 9.17 12.67 11.00 28.5424 Benin 17.3 6.8 10.6 21.1 20.4 8.2 6.19 5.25 9.38 8.0025 Central African Rep. 12.7 6.9 13.5 18.9 18.3 7.9 5.50 7.19 10.50 11.4226 Kenya 18.6 15.3 . . 37.7 39.9 10.3 5.75 10.31 10.58 14.0027 Sudan 21.0 34.8 14.1 28.2 35.5 31.7 6.0028 Pakistan 14.7 14.8 40.8 38.7 39.6 7.329 Haiti 20.3 . . 9.9 26.1 16.4 7.9 10.00 . . .

30 Lesotho . . 18.9 . . . . 49.3 12.3 9.60 7.00 11.00 11.1331 Nigeria 28.5 10.2 9.9 21.5 26.3 10.1 5.27 13.09 8.43 13.9632 Ghana 25.9 44.2 20.3 16.2 11.7 48.3 11,50 17.58 19.00 25.5033 Sri Lanka 15.4 16.7 32.3 35.3 36.7 12.4 14.50 11.50 19.00 9.8034 Yemen,PDR 15.2 12.0 . . 114.8 175.2 5.0 . .

35 Mauritania 20.7 12.5 5.7 20.5 23.5 9.8 6.00 12.0036 Indonesia 54.4 23.9 13.2 26.9 8.5 6.00 16.78 21.6737 Liberia 1.5 10.30 5.88 18.40 13.6338 Afghanistan 14.0 16.2 14.4 26.8 9.00 9.00 13.00 13.0039 Burma 11.5 14.3 1.50 1.50 8.00 8.0040 Guinea

41 Kampuchea,Dem.42 VietNam

Middle-income economiesLower-middle-income

43 Senegal 15.6 8.7 15.3 27.0 23.5 9.1 6.19 5.25 9.38 8.0044 Bolivia 24.3 589.2 10.9 16.2 21.7 601.8 18.00 . . 28.0045 Zimbabwe . . 18.1 . . 54.6 61.6 12.4 3.52 9.58 17.54 13.0046 Philippines 17.7 15.9 19.9 19.0 20.7 16.7 12.25 8.20 14.00 13.3447 YemenArabRep. . . 22.0 . . 61.8 73.9 11.4 9.33 9.50 .

48 Morocco 15.8 14.4 29.4 45.4 58.0 7.3 4.88 8.50 7.00 9.0049 Egypt, Arab Rep. 17.7 22.6 35.3 52.2 93.8 9.2 7.04 . . .50 PapuaNewGuinea . . 9.4 . . 32.9 34.1 4.4 6.90 9.60 11.15 11.9451 DominicanRep. 18.5 22.4 18.0 23.4 29.5 16.3 . . . . . .

52 Côted'Ivoire 20.4 8.1 21.8 25.8 31.0 4.4 6.19 5.25 9.38 8.0053 Honduras 14.6 11.3 15.4 22.8 30.5 4.9 7.00 9.62 18.50 15.5454 Nicaragua 15.0 . . 15.4 21.0 . 86.6 7.50 . . . .

55 Thailand 17.8 18.4 23.6 37.3 64.9 2.8 12.00 9.50 18.00 15.0056 ElSalvador 14.3 18.3 21.6 28.1 31.5 16.5 . . . . . .

57 Congo, People's Rep. 14.2 10.3 16.5 14.7 20.8 1.8 6.50 7.79 11.00 11.1358 Jamaica 17.2 25.6 24.3 35.6 52.7 19.4 10.29 17.50 13.00 23.0059 Guatemala 16.3 14.1 15.2 20.5 22.9 12.7 9.00 11.00 .

60 Cameroon 19.1 13.8 11.7 18.3 18.7 8.1 7.50 7.15 13.00 13.0061 Paraguay 21.3 18.9 12.1 19.8 16.3 21.062 Ecuador 22.6 30.0 15.6 20.2 18.8 29.5

63 Botswana . . 23.5 . . 30.7 29.5 8.4 5.00 7.50 8.48 10.0064 Tunisia 17.4 15.5 29.2 41.1 . . 8.2 2.50 5.50 7.25 10.0065 Turkey 27.4 49.8 23.0 16.7 24.5 37.4 10.95 35.40 25.67 50.0066 Colombia 26.5 . . 19.8 23.7 23.7 19.0067 Chile 137.5 16.3 17.6 20.6 37.46 26.60 47.14 38.28

High-income economiesOECD members

tOther

Nonreporting nonmembers

a. Includes Luxembourg.

Total reporting economiesOil exporters

Low- and middle-incomeSub-Saharan AfricaEast AsiaSouth AsiaEurope, M.East, & N.AfricaLatin America & Caribbean

17 highly indebted

189

Monetary holdings, broadly defined Averageannual

inflation(GD? deflator)

Nominal interest rates of banks(average annualpercentage)

Average annualnominal growthrate (percent)

Average outstanding(percentage of GDP) Deposit rate Lending rate

1965-80 1980-87 1965 1980 1987 1980-87 1980 1987 1980 1987

68 Pent 25.9 100.8 18.7 16.3 101.569 Mauntius 21.8 18.3 27.3 41.1 50.0 8.1 9.25 9.38 12.19 14.1370 Jordan 19.1 12.7 . . 88.8 132.9 2.871 Costa Rica 24.6 27.0 19.3 38.8 36.9 28.6 14.06 23.8272 Syrian Arab Rep. 21.9 21.1 24.6 40.9 11.0 5.00

73 Malaysia 21.5 13.5 26.3 69.8 124.3 1.1 6.23 717 7.75 8.1974 Mexico 21.9 66.2 25.1 27.5 21.0 68.9 20.63 97.24 28.1075 South Africa 14.0 15.0 56.6 49.5 51.0 13.8 5.54 8.70 9.50 12.5076 Poland .. 24.0 . . 58.3 38.1 29.2 3.00 6.00 8.00 12.0077 Lebanon 16.2 42.3 83.4 .. .

Upper-middle-income

78 Brazil 43.4 . . 20.6 18.0 . . 166.3 115.00 517.4079 Uruguay 65.5 53.8 28.0 30.5 34.7 54.5 50.30 60.83 66.62 95.8080 Hungary . . 7.5 46.5 46.8 5.7 3.00 4.00 9.00 11.5081 Panama . . . . . . . . 3.3 . . .

82 Argentina 86.0 283.8 22.2 19.1 298.7 87.97 61.23

83 Yugoslavia 25.7 54.4 43.6 59.1 46.0 57.2 5.88 79.25 11.50 111.2584 Algeria 22.1 17.5 32.1 58.5 . . 5.6 . . . . .

85 Korea, Rep. 35.5 18.7 11.1 31.8 44.1 5.0 19.50 10.00 18.00 10.0086 Gabon 25.2 8.4 16.2 15.2 24.4 2.6 7.50 7.94 12.50 11.1387 Portugal 19.5 22.8 77.7 96.3 104.7 20.8 18.20 18.50

88 Venezuela 22.3 16.0 17.3 36.3 45.8 11.4 . . 8.94 . . 8.4889 Greece 21.4 25.1 35.0 61.6 80.0 19.7 14.50 15.50 21.25 21.8290 TrinidadandTobago 23.1 12.4 21.3 32.0 . . 6.2 6.57 6.03 10.00 11.5091 Libya 29.2 2.2 14.2 34.7 . . 0.1 5.13 5.50 7.00 7.0092 Oman 19.8 12.3 28.6 -6.5 7.48 . . 9.10

93 Iran, Islamic Rep. 28.6 . . 21.694 Iraq 19.795 Rornania 7

96 Spain 19.7 9.1 59.2 7'5.2 64.8 10.7' 13.05 8.97 16.85 16.3697 Ireland 16.1 6.4 . . 58.1 47.6 10.2 12.00 6.21 15.96 11.1598 tSaudi Arabia 32.1 11.6 16.4 18.6 52.6 -2.899 tlsrael 52.8 163.4 15.0 56.9 67.3 159.0 19.39 176.93 61.43

100 New Zealand 12.8 16.4 57.2 53.2 55.3 11.5 11.00 16.32 12.63

101 tSingapore 17.8 11.6 58.4 74.4 104.8 1.3 9.37 2.89 11.72 6.10102 tHong Kong 69.3 6.7103 Italy 17.8 12.2 60.0 76.0 665 11.5 12.70 6.98 19.03 13.57104 United Kingdom 13.8 13.2 47.8 46.2 65.0 5.7 14.13 5.35 16.17 9.63105 Australia 13.1 12.7 51.7 46.9 477 7.8 8.58 13.77 10.58 19.83

106 Belgiuma 10.4 6.5 59.2 57.0 56.2 5.7 7.69 5.00 9.33107 Netherlands 14.7 5.8 55.2 79.0 87.7 2.3 5.96 3.55 13.50 8.15108 Austria109 France

13.315.3

7.59.1

48.953.5

72.672.5

84.172.1

4.37.7

5.006.25

3.035.31 18.73 is.i

110 Germany, Fed. Rep. 10.1 5.7 46.1 60.4 64.7 2.9 7.95 3.20 12.04 8.36

Ill Finland 14.7 13.9 39.1 39.5 48.9 7.2 9.00 7.00 9.77 8.91112 tKuwait 17.8 5.6 28.1 33.1 93.1 -4.6 4.50 4.50 6.80 6.80113 Denmark 11.5 15.6 45.8 42.6 58.7 6.8 10.80 7.07 17.20 13.62114 Canada 15.3 7.3 40.2 64.5 62.7 5.0 12.86 7.66 14.27 9.52115 Sweden 10.8 5.2 39.3 40.6 . . 7.9 11.25 8.94 15.12 12.99

116 Japan 17.2 8.6 106.9 134.0 170.3 1.4 5.50 1.76 8.32 5.09117 tUnited Arab Emirates 13.0 . . 19.0 63.0 -0.3 9.47 12.13118 Norway 12.6 12.7 51.9 51.6 59.1 6.1 5.08 5.35 12.63 13.46119 United States 9.2 9.9 63.9 58.8 68.0 4.3 13.07 8.21 15.27 8.21120 Switzerland 7.1 8.4 101.1 107.4 121.5 3.9 7.75 3.19 5.56 5.24

Table 14. Growth of merchandise trade

190

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Merchandise trade

(millions ofdollars)

Average annual growth rate a

(percent)Terms oftrade

(1980=100)Exports1987

Imports1987

Exports Imports

1965-80 1980-87 1965-80 1980-87 1985 1987

Low-income economies 95,802 1 116,254 1 5.6w 3.4w 4.5w 2.3w 92m 84mChina and India 52,090 t 62,377 4.8w 9.6w 4.5 w 10.6w lO4tn 101mOther low-income 43,712 1 153,877 5.9w -0.1 w 4.5 w -3.9w 91m 84m

1 Ethiopia 402 1,150 -0.5 -0.6 -0.9 7.6 99 842 Bhutan 25 883 Chad4 Zaire 1,594 1,149 4.7 -3.4 -2.9 -o145 Bangladesh 1,074 2,620 6.2 2.3 124 91

6 Malawi 264 281 4.1 3.4 3.3 -6.1 73 677 Nepal 151 569 -2.3 5.1 3.0 6.4 91 938 La0PDR 30 709 Mozambique 89 486

10 Tanzania 348 1,165 -4.0 -7.4 1.6

11 Burkina Faso 202 540 6.8 4.9 5.8 2.0 80 7412 Madagascar 310 386 0.7 -3.1 -0.4 -2.9 104 10513 Mali 216 447 11.0 6.6 6.2 3.4 82 8614 Bunindi 84 206 3.0 8.3 2.0 2.4 100 7515 Zambia 869 745 1.7 -3.3 -5.5 -6.2 72 7916 Niger 361 417 12.8 -4.8 6.6 -6.2 108 8617 Uganda 320 477 -3.9 2.7 -5.3 3.0 96 6718 China* 39,542 43,392 5.5 11.7 7.9 14.2 95 8719 Somalia 94 452 3.8 -7.7 5.8 -1.3 91 8420 Togo 297 417 4.6 -3.0 8.6 -4.6 90 8621 India 12,548 18,985 3.7 3.6 1.6 4.7 114 11422 Rwanda 121 352 7.7 2.5 8.7 5.4 102 8723 Sierra Leone 120 132 -3.8 -2.1 -2.7 -15.1 100 9324 Benin 168 418 5.2 -0.1 6.7 0.4 90 8825 Central African Rep. 130 186 -0.4 1.0 -1.1 -1.8 88 84

26 Kenya 961 1,755 0.3 -0.6 1.7 -3.0 92 8027 Sudan 482 694 -0.3 4.2 2.3 -8.7 90 8428 Pakistan 4,172 5,822 4.3 8.4 0.4 3.4 88 9929 Haiti 261 378 7.0 -2.0 8.4 -2.5 97 10930 Lesothob

31 Nigeria 7,365 7,816 11.4 -5.1 15.2 -14.0 90 5432 Ghana 1,056 836 -1.8 -1.6 -1.4 -2.9 91 8533 SriLanka 1,393 2,085 0.5 6.5 -1.2 3.2 99 9634 Yemen, PDR 409 1,450 -13.7 1.7 -7.5 3.3 99 7335 Mauritania 428 474 2.7 11.2 5.4 1.7 112 9836 Indonesia 17,206 14,453 9.6 2.7 14.2 -2.2 94 6937 Liberia 385 208 4.5 -2.6 1.5 -10.2 91 9338 Afghanistan 552 1,40439 Burma 219 628 -2.1 -4.7 -8.7 6540 Guinea41 Kampuchea,Dem.42 VietNam 1,0 1,874

Middle-income economies 369,9781 353,481 2.4w 5.5w 5.9w -0.5 w 92m 79mLower-middle-income 144,178 t 146,317 5.3w 5.3w 4.1w -1.7w 92m 78m

43 Senegal 645 1,174 2.4 6.7 4.1 2.7 100 9644 Bolivia 566 776 2.8 -0.8 5.0 -1.6 84 5145 Zimbabwe 1,358 1,055 3.4 0.9 -1.8 -6.8 84 8446 Philippines 5,649 7,144 4.7 -0.4 2.9 -4.0 92 9847 Yemen Arab Rep. 19 1,311 2.8 -4.0 23.3 -11.0 93 9348 Morocco 2,807 4,229 3.7 3.7 6.5 1.6 89 10649 Egypt, Arab Rep. 4,040 8,453 2.7 8.4 6.0 2.8 84 6450 Papua New Guinea 1,172 1,222 12.8 4.9 1.3 0.3 95 8451 Dominican Rep. 711 1,783 1.7 -0.1 5,5 1.4 66 6052 Côte d'Ivoire 2,982 2,168 5.6 3.4 8.0 -3.1 96 8653 Honduras 827 895 3.1 3.1 2.5 -0.2 93 8354 Nicaragua 300 923 2.3 -5.2 1.3 0.8 85 7755 Thailand 11,659 12,955 8.5 10.2 4.1 3.4 74 8156 El Salvador 634 975 2.4 -4.6 2.7 -0.7 96 7557 Congo, People's Rep. 884 570 12.5 3.9 1.0 -0.7 94 64

58 Jamaica 649 1,207 -0.3 -6.2 -1.9 -1.5 95 10059 Guatemala 1,084 1,479 4.8 -1.6 4.6 -4.6 87 8060 Camemon 1,714 2,168 5.2 9.7 5.6 3.4 92 6661 Paraguay 952 1,202 7.9 13.8 4.6 2.2 82 7662 Ecuador 2,021 2,250 15.1 5.5 6.8 -1.4 94 61

63 Botswana'64 Tunisia 2,152 3,022 10.8 2.2 10..' -2.5 83 7965 Turkey 10,190 14,163 5.5 17.1 7.7 11.1 91 11066 Colombia 5,024 4,230 1.4 7.5 5.3 -4.2 98 7067 Chile 5,091 4,023 7.9 4.3 2.6 -8.3 79 77

* Data for Taiwan, China are: 50,835 34,341 19.0 13.5 15.1 6.5 104 103

a. See the technical notes. b. Figures are for the South African Customs Union comprising South Africa, Namibia, Lesotho, Botswana, and Swaziland; trade betweenthe component territories is excluded. c. Includes Luxembourg.

191

Merchandise trade(millions of dollars)

Average annual growth rc#e

(percent) Terms of trade

(1980=100)Exports Imports Exports Imports

1987 1987 1965-80 1980-87 1965-80 1980-87 /985 1987

68 Pent 2,605 4,060 2.3 -0.8 -0.2 -2.5 6969 Mauritius 918 1,010 3.1 11.1 6.4 6.7 90 10870 Jordan 930 2,691 13.7 5.9 9.7 0.6 93 10671 CostaRica 1,155 1,377 7.0 2.6 5.7 -1.5 95 8472 SyrianArabRep. 1,357 2,546 11.4 -1.3 8.5 -5.3 95 78

73 Malaysia 17,865 12,506 4.4 9.7 2.9 -0.7 86 7274 Mexico 20,887 12,731 7.6 6.6 5.7 -8.1 98 7375 SouthAfricab 20,066 14,629 6.1 -0.1 0.1 -8.8 75 71

76 Poland 12,205 10,844 4.3 1.2 106 11277 Lebanon 591 1,880

Upper-middle-income 225,853 t 207,164 t lOw 5.6w 7.6w 0.5w 92m 88m

78 Brazil 26,225 16,581 9.3 5.6 8.2 -4.2 89 9779 Uruguay 1,190 1,140 4.6 1.4 1.2 -6.5 87 9780 Hungaly 9,571 9,855 3.9 1.5 92 8981 Panama 357 1,248 . . 3.8 . . -3.3 94 7182 Argentina 6,360 5,818 4.7 -0.3 1.8 -9.4 90 81

83 Yugoslavia 11,397 12,549 5.6 1.1 6.6 -2.0 111 11684 Algeria 9,029 7,028 1.5 3.2 13.0 -4.6 97 5685 Korea, Rep. 47,172 40,934 27.2 14.3 15.2 9.6 106 10586 Gabon 1,285 836 8.1 -1.9 10.5 3.0 90 6487 Portugal 9,167 13,438 3.4 12.2 3.7 3.8 85 99

88 Venezuela 10,567 8,725 -9.5 -0.4 8.7 -7.0 93 5489 Greece 6,489 12,908 11.9 6.6 5.2 4.8 88 9390 TrinidadandTobago 1,462 1,219 -5.5 -7.1 -5.8 -15.1 96 6191 Libya 6,061 4,877 3.3 -5.9 15.3 -15.3 92 4792 Oman 3,941 1,882

93 Iran, Islamic Rep. . . 10,35994 Iraq 9,014 7,41595 Romania 12,543 11,437

Low- and middle-income 465,780 t 469,736 t 3.1 w 5.0 w 5.5 w 0.1 w 92 in 83 mSub-Saharan Africa 28,471 t 32,516 t 6.6w -1.0w 5.0w -5.8w 91 m 84 mEast Asia 193,993 1 170,740 I 9.7 w 10.1 w 8.6 w 6.1 w 94 m 84 inSouth Asia 19,616 1 30,871 t 1.7 w 4.8w 0.6 w 3.7 w 95 in 94,0Europe, M.East, & N.Africa 113,691 1 146,301 I . . . . . . 0.4 w 92 m 93 mLatin America & Caribbean 89,943 t 74,679 t -2.1 w 3.0w 4.4 w -5.6w 90 in 76 in

17 highly indebted 112,628 t 95,193 t 0.4w 2.1 w 6.3 w -6.0w 92 in 84 in

High-income economies 1,924,470 t 2,007,404 t 7.0 w 3.3 w 4.4 w 4.8 w 94 in 97 inOECD members 1,784,793 I 1,871,384 1 7.2 w 4.2 w 4.2 w 5.2 w 94 in 98 m

tOther 139,677 I 136,020 t 6.0w -4.2w 10.6 w 0.4w 95 in 54 in

96 Spain 34,099 49,009 12.4 6.9 4.4 5.6 90 111

97 Ireland 15,970 13,614 9.8 8.1 4.8 2.6 107 107

98 lSaudi Arabia 23,138 20,465 8.8 -16.3 25.9 -9.3 95 5499 tlsrael 8,475 14,300 8.9 7.3 6.3 3.8 94 89

100 NewZealand 7,179 7,255 4.2 4.5 1.1 4.2 97 98

101 tSingapore 28,592 32,480 4.7 6.1 7.0 3.7 101 102102 tHong Kong 48,475 48,462 9.5 11.4 8.3 9.1 103 106103 Italy 116,582 122,211 7.7 3.8 3.5 4.3 95 114104 United Kingdom 131,128 154,388 4.8 3.0 1.4 4.8 96 99105 Australia 25,283 29,318 5.5 6.0 0.9 2.9 89 72

106 Belgiume 82,951 82,598 7.8 4.5 5.2 3.2 87 98107 Netherlands 92,882 91,317 8.0 4.6 4.4 3.0 91 93108 Austria 27,163 32,638 8.2 5.3 6.1 4.7 90 108

109 France 143,077 157,524 8.5 3.5 4.3 2.2 94 104110 Germany, Fed. Rep. 293,790 227,334 7.2 4.7 5.3 4.6 88 120

Ill Finland 20,039 19,860 5.9 3.8 3.1 3.5 96 109

112 tKuwait 8,355 5,297 -1.9 -3.2 11.8 -5.5 92 54113 Denmark 24,697 25,334 5.4 5.7 1.7 5.7 96 106114 Canada 92,886 92,594 5.4 6.3 2.6 7.3 122 101

115 Sweden 44,313 40,621 4.9 5.7 1.8 2.8 88 96

116 Japan 229,055 146,048 11.4 5.8 4.9 3.6 112 153117 tUnited Arab Emirates 12,000 7,226 10.9 0.1 20.5 -7.1 91 54118 Norway 21,449 22,578 8.2 6.2 3.0 3.5 97 72119 UnitedStates 252,567 422,407 6.4 -0.5 5.5 9.7 114 116120 Switzerland 45,357 50,557 6.2 4.6 4.5 5.3 88 113

Total reporting economies 2,390,197 I 2,477,6611 6.1w 3.4w 4.6w 3.9w 93m 84mOil exporters 168,325 1 153,727 1 3.0 w -3.7 w 9.3w -5.7w 94in 61m

Nonreporting nonmembers

Table 15. Structure of merchandise hnportsPercentage share of merchanthse imports

Other Machineryprimary and transport Other

Food Fuels commodities equipment manufactures

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

192

Low-income economiesChina and IndiaOther low-income

1965

22w28w17w

1987

7w5w9w

1965

5w3w7w

1987

9w5w

14w

1965

lOw19w4w

1987

7wlOw4w

1965

28w26w29w

1987

34w34w33w

1965

34w24w42w

1987

43w47w39w

1 Ethiopia 6 4 6 18 6 3 37 37 44 382 Bhutan3Chad 13 .. 19 .. 3 .. 23 .. 424 Zaire 18 13 7 3 5 5 33 37 37 425 Bangladesh 16 9 6 28 426 Malawi 15 5 5 9 3 3 21 33 57 497 Nepal 22 6 5 8 14 7 37 22 22 578 LaoPDR 27 15 6 18 339 Mozambique 17 8 7 24 45

10 Tanzania 10 6 9 17 2 2 34 44 45 31II BurkinaFaso 23 16 4 3 14 5 19 34 40 4212 Madagascar 19 9 5 29 2 2 25 30 48 3013 Mali 20 12 6 16 5 2 23 44 47 2714 Bunindi 16 12 6 5 9 5 15 23 55 5515 Zambia 9 7 10 12 3 1 33 39 45 4116 Niger 12 18 6 6 6 11 21 31 55 3317 Uganda 7 5 1 9 3 2 38 46 51 3818 China* 36 3 0 2 25 11 12 39 27 4619 Somalia 31 13 5 3 8 6 24 47 33 3220 logo 15 20 3 6 5 6 31 28 45 4021 India 22 8 5 11 14 8 37 24 22 4822 Rwanda 12 12 7 15 5 7 28 30 50 3523 SierraLeone 17 17 9 9 3 4 30 20 41 4924 Benin 18 II 6 34 7 2 17 16 53 3725 CentralAfricanRep. 13 13 7 1 2 4 29 39 49 4326 Kenya 10 9 11 21 3 4 34 34 42 3327 Sudan 23 17 5 22 4 3 21 26 47 3228 Pakistan 20 16 3 19 5 7 38 31 34 2729 Haiti 25 27 6 11 6 5 14 19 48 3830 Lesotho31 Nigeria 9 8 6 3 3 3 34 36 48 5032 Ghana 12 6 4 17 3 3 33 36 48 3733 SriLanka 41 17 8 17 4 3 12 27 34 3734 Yemen, PDR 19 16 40 36 5 2 10 24 26 2235 Mauritania 9 26 4 10 1 2 56 35 30 2736 Indonesia 6 3 3 16 2 3 39 39 50 3937 Liberia 16 19 8 21 3 3 34 29 39 2938 Afghanistan 17 4 1 8 . 6939 Burma 15 5 4 2 5 2 18 43 58 4840 Guinea41 Kampuchea,Dem. 6 7 . 2 26 5842 VietNam

. .

Middle-income economies 15 w 10 w 8 w 12 w 11 w lOw 31 w 35 w 36w 35 wLower-middle-income 15 w lOw 7 w 10 w 9 w 7 w 33 w 35 w 36 w 38 w

43 Senegal 36 32 6 16 4 2 15 16 38 3344 Bolivia 19 15 1 2 3 3 35 45 42 3645 Zimbabwe 13 10 8 8 3 3 31 36 46 4346 Philippines 20 8 10 17 7 7 33 28 30 4047 YemenArabRep. 40 27 6 0 6 2 26 32 21 3948 Morocco 36 14 5 18 10 15 18 24 31 2849 Egypt,Arab Rep. 26 24 7 2 12 7 23 28 31 3950 Papua New Guinea 23 20 5 10 3 1 25 34 45 3551 DominicanRep. 23 13 10 15 4 5 24 27 40 4052 Côted'Ivoire 18 19 6 15 3 4 28 28 46 3553 Honduras 11 5 6 14 I 1 26 31 56 4854 Nicaragua 12 15 5 11 2 2 30 20 51 5355 Thailand 6 5 9 13 6 9 31 32 49 4056 ElSalvador 15 12 5 8 4 4 28 20 48 5657 Congo, People's Rep. 15 16 6 7 1 3 34 27 44 4658 Jamaica 20 16 9 17 5 4 23 20 43 4359 Guatemala II 6 7 12 2 4 29 28 50 5160 Cameroon 11 13 5 I 4 3 28 36 51 4661 Paraguay 24 14 14 8 4 8 31 41 28 2962 Ecuador 10 5 9 3 4 3 33 52 44 3863 Botswanaa . . . . . . . . . . . .64 Tunisia 16 11 6 II 7 12 31 22 41 4465 Turkey 6 4 10 22 10 13 37 29 37 3266 Colombia 8 8 1 3 10 8 45 39 35 4367 Chile 20 12 6 10 10 4 35 39 30 36

* Data for Taiwan, China are: 13 7 5 9 25 17 29 33 29 34

Total reporting economiesOil exporters

Nonreporting nonmembers

18w lOw14w 12w

lOw 11w7w 5w

18w 8w8w 4w

22w 34w34w 38w

32w 39w39w 42w

a. Figures are for the South African Customs Union comprising South Africa, Namibia, Lesotho, Botswana, and Swaziland; trade between the component territories isexcluded. b. Includes Luxembourg.

193

78 Brazil 20 9 21 27 9 8 22 28 28 2879 Uruguay 7 8 17 16 16 7 24 30 36 3980 Hungaiy 12 7 12 17 22 10 27 31 28 3681 Panama 11 3 21 8 2 0 21 32 45 5782 Argentina 6 5 10 11 21 9 25 37 38 37

83 Yugoslavia 16 6 6 17 19 10 28 30 32 3584 Algeria 26 27 0 2 6 7 15 29 52 3585 Korea,Rep. 15 6 7 15 26 17 13 34 38 2886 Gabon 16 18 5 1 2 3 38 38 40 3987 Portugal 16 13 8 12 19 8 27 33 30 34

88 Venezuela 12 14 1 0 5 4 44 45 39 3689 Greece 15 18 8 14 11 7 35 24 30 3690 TrinidadandTobago 11 22 50 4 2 5 16 30 22 3991 Libya 13 15 4 1 3 2 36 33 43 4992 Oman 19 3 3 49 26

93 lran,IslamicRep. 16 0 6 36 4294 Iraq 24 0 7 25 4495 Romania

Low- and middle-incomeSub-Saharan AfricaEast AsiaSouth AsiaEurope, M.East, & N.AfricaLatin America & Caribbean

17 w14 w21 w29 w

ii

9w12 w6w

10 w14 w10 w

7w6w6w4w

9w

11w10 w10 w13 w15wlOw

11w4w

15w11w

8w

9w4w

12w7w

lOw6w

30 w30 w23 w32 w

34 w

35 w33 w36 w26 w32 w37 w

36 w44w34 w26 w

w

38 w41 w36 w43 w31w36 w

17 highly indebted 14w 10w 7 w 12 w lOw 7 w 34 w 36 w 35 w 36 w

High-income economiesOECD members

tOther

19 w19 w22w

lOw10 w9w

11 w11 w8w

11 w11 w7w

19w20 w13w

7w7w5w

20w20w20w

33w33w33w

31w31w39w

39w38w46w

96 Spain 19 II 10 16 16 8 27 35 28 2997 Ireland 18 12 8 7 10 4 25 33 39 4298 tSaudi Arabia 29 17 1 1 5 2 27 34 38 4699 tlsrael 16 6 6 7 12 6 28 39 38 41

100 New Zealand 7 7 7 7 10 4 33 39 43 44

101 tSingapore 23 8 13 18 19 5 14 39 30 30102 tHongKong 25 8 3 3 13 6 13 25 46 59103 Italy 24 15 16 14 24 11 15 28 21 33104 UnitedKingdom 30 12 11 6 25 7 11 35 23 40105 Australia 5 5 8 5 10 4 37 39 41 47

106 Belgium' 14 11 9 9 21 8 24 29 32 42107 Netherlands 15 15 10 11 13 5 25 28 37 41108 Austria 14 6 7 7 13 7 31 35 35 45109 France 19 11 15 11 18 7 20 31 27 40110 Germany, Fed. Rep. 22 12 8 10 21 8 13 28 35 43

Ill Finland 10 6 10 13 12 7 35 37 34 37112 tKuwait 21 16 1 0 7 3 33 39 39 42113 Demnark 14 12 11 8 11 6 25 30 39 44114 Canada 10 6 7 5 9 5 40 55 34 30115 Sweden 12 7 11 9 12 6 30 38 36 40

116 Japan 22 17 20 27 38 18 9 12 11 27117 tUnited Arab Emirates 15 4 3 3 7 1 34 43 41 49118 Norway 10 6 7 5 12 6 38 39 32 43119 UnitedStates 19 6 10 11 20 5 14 42 36 36120 Switzerland 16 7 6 4 11 6 24 32 43 51

Percentage share of merchandise imports

Food Fuels

Otherprimary

commodities

Machineryand transport

equipmentOther

manufactures

1965 1987 1965 1987 1965 1987 1965 1987 1965 1987

68 Peru 17 13 3 1 5 3 41 47 34 3669 Mauritius 34 19 5 7 3 5 16 20 43 4870 Jordan 28 18 6 17 6 5 18 21 42 3971 CostaRica 9 4 5 10 2 2 29 30 54 5472 SyrianArabRep. 22 12 10 26 9 4 16 24 43 33

73 Malaysia 25 10 12 6 10 4 22 50 32 3074 Mexico 5 11 2 1 10 8 50 46 33 3475 South Africaa 5 2 5 0 11 4 42 43 37 5076 Poland 11 17 11 32 3077 Lebanon 28 9 9 17 36

Upper-middle-income 14 w 11 w 9 w 14 w 13 w 12 w 27 w 34 w 35 w 31 w

Table 16. Structure of merchandise exports

194

Percentage share of merchandise exports

Note: For data comparability and coverage, aee the technical notes. Figures in italics are for years other than those specified.

1965

22 w8 w

30 w

1987

29 w13 w48 w

1965 1987 1965 1987 1965 1987 1965 1987

7w

9w

Low-income economiesChina and IndiaOther low-income

53 w45 w60 w

22 w17 w27 w

1w2w1w

4w6w3w

23w45w8w

45w64w21w

11w

4w1 Ethiopia 1 3 98 96 1 0 0 1 0 02 Bhutan . 4

3Chad 4 .. 93 0 ..4 Zaire 72 63 20 31 0 1 8 5 05 Bangladesh 16 33 17 33

6 Malawi 0 0 99 84 0 5 1 11 07 Nepal 0 2 78 26 0 2 22 70 378 LaoPDR .. ..9 Mozambique 14 . . 83 . . 0 . . 2 . .

10 Tanzania 4 7 83 75 0 3 13 15 011 Burkina Faso 1 0 94 98 I 1 4 1 212 Madagascar 4 11 90 78 1 2 4 9 1 313 Mali 1 0 96 71 I 1 2 2814 Burundi 1 1 94 85 0 0 6 15 015 Zambia 97 93 3 4 0 1 0 2 016 Niger 0 86 95 13 1 0 4 1 1

17 Uganda 14 4 86 96 0 0 1 0 018 China* 6 14 48 16 3 4 43 6619 Somalia 6 1 80 98 4 0 10 1 020 Togo 49 66 48 26 1 1 3 7 021 India 10 9 41 22 1 10 48 59 36 1622 Rwanda 40 9 60 90 0 0 1 1 023 Sierra Leone 25 22 14 19 0 1 60 58 024 Benin I 42 94 38 2 6 3 15 025 Central African Rep. 1 0 45 66 0 0 54 33 026 Kenya 13 21 81 62 0 2 6 15 027 Sudan 1 14 98 79 I 3 0 4 028 Pakistan 2 1 62 32 1 3 35 64 29 4129 Haiti 14 0 61 19 2 9 23 73 330 Lesoth&'31 Nigeria 32 91 65 8 0 0 2 1 032 Ghana 13 37 85 60 1 0 2 2 033 SriLanka 2 8 97 52 0 2 1 38 0 2534 Yemen,PDR 80 92 14 8 2 0 4 0 235 Mauritania 94 31 5 66 1 0 0 2 036 Indonesia 43 54 53 18 3 3 1 24 0 537 Liberia 72 57 25 41 1 0 3 1 038 Afghanistan 0 . . 86 . . 0 . . 13 . . 1339 Burma 5 4 94 85 0 8 0 3 040 Guinea41 Kampuchea, Dem.42 VietNam

Middle-income economies 35 w 23 w 53w 20w Ow 16w 13w 43w 3w 12wLower-middle-income 27 w 26 w 59w 27w Ow 13w 12w 34w 2w 7w

43 Senegal 9 25 88 60 1 4 2 11 1

44 Bolivia 92 93 3 5 0 0 4 2 0 045 Zimbabwe 45 17 40 43 1 3 15 37 646 Philippines 11 14 84 24 0 6 6 56 1 647 YemenArabRep. 9 1 91 21 0 63 0 15

48 Morocco 40 20 55 32 0 1 5 48 1 1649 Egypt, Arab Rep. 8 69 72 12 0 0 20 19 15 1250 Papua New Guinea 1 59 89 35 0 1 10 551 DominicanRep. 10 17 88 61 0 5 2 17 052 Cole d'Jvoire 2 4 93 86 1 2 4 7 1 1

53 Honduras 7 10 89 78 0 0 4 12 1 054 Nicaragua 4 2 90 88 0 0 6 10 055 Thailand 11 2 84 45 0 12 4 41 0 1856 El Salvador 2 3 81 66 1 3 16 28 657 Congo, People's Rep. 5 67 32 17 2 1 61 15 0 0

58 Jamaica 28 14 41 21 0 4 31 62 459 Guatemala 0 3 86 62 1 3 13 33 460 Cameroon 17 51 77 40 3 5 2 4 061 Paraguay 0 1 92 87 0 0 8 12 062 Ecuador 2 41 96 55 0 1 2 3 1

63 Botswanab64 Thnisia 26 i i3 o 2 2965 Thrkey 9 6 89 27 0 7 2 60 1 3366 Colombia 18 33 75 46 0 1 6 20 2 467 Chile 89 69 7 23 1 3 4 6 0 0

* Data for Taiwan, China are: 2 1 56 6 4 30 37 63 5 17

Fuels, Other Machinery andminerals, primary transport Other (Textiles

and metals commodities equipment manufactures and clothing)a

Total reporting economiesOil exporters

Nonreporting nonmembers

15w 12w67w 69w

27w 14w 25w 35w25w 7w 3w lOw

35w 40w 7w 6w7w 12w 1w

a. Textiles and clothing is a subgmup of other manufactures. b. Figures are for the South African Customs Union comprising South Africa, Namibia, Lesotho,Botswana, and Swaziland; trade between the component territories is excluded. c. Includes Luxembourg.

195

96 Spain 9 8 51 20 10 31 29 40 6 497 Ireland 3 2 63 29 5 32 29 36 7 598 tSaudi Arabia 98 90 1 1 1 4 1 5 099 tlsrael 6 2 28 13 2 18 63 67 9 7

100 New Zealand 1 6 94 69 0 6 5 19 0 3

101 tSingapore 21 17 44 11 11 43 24 29 6 6102 tHongKong 2 2 11 6 6 22 81 70 44 34103 Italy 8 4 14 8 30 35 47 53 15 14104 UnitedKingdom 7 14 10 9 41 37 41 40 7 4105 Australia 13 37 73 38 5 8 10 17 1 1

106 Belgiumc 13 8 11 12 20 27 55 54 12 7107 Netherlands 12 14 32 26 21 20 35 40 9 5108 Austria 8 5 16 8 20 33 55 54 12 9109 France 8 5 21 19 26 36 45 41 10 5110 Geimany, Fed. Rep. 7 4 5 6 46 49 42 41 5 5

111 Finland 3 5 40 15 12 27 45 53 2 4112 tKuwait 84 85 9 2 4 4 3 7 0113 Denmark 2 4 55 35 22 25 21 36 4 5114 Canada 28 19 35 20 15 38 22 23 1 1

115 Sweden 9 6 23 10 35 44 33 40 2 2

116 Japan 2 1 7 I 31 65 60 32 17 3117 tUnited Arab Emirates 99 79 1 4 0 0 0 16 .

118 Norway 21 51 28 II 17 17 34 21 2 1

119 United States 8 6 27 16 37 47 28 31 3 2120 Switzerland 3 3 7 4 30 35 60 58 10 6

Upper-middle-income 40w 22 w 46w 15 w 3 w 25 w 13 w 40 w 4w 15 w

Tg Brazif 9 22 83 33 2 17 7 28 1 379 Uruguay 0 0 95 55 0 3 5 41 2 1780 Hungary . . 7 . . 22 . . 34 . . 37 . 781 Panama 35 13 63 73 0 0 2 13 1 382 Argentina I 4 93 65 1 6 5 25 0 3

83 Yugoslavia 11 9 33 13 24 30 33 48 8 984 Algeria 58 98 38 0 2 0 2 1 0 085 Korea, Rep. 15 2 25 5 3 33 56 59 27 2586 Gabon 50 63 39 26 1 2 10 8 087 Portugal 4 3 34 16 3 16 58 64 24 32

88 Venezuela 97 91 1 I 0 2 2 6 089 Greece 8 13 78 33 2 3 II 51 3 3290 TrinidadandTobago 84 72 9 5 0 1 7 22 0 091 Libya 99 99 1 1 1 0 0 0 092 Oman 91 2 5 2 0

93 Iran,IslamicRep. 87 8 0 4 494 Iraq 95 4 .. 0 095 Romania

Low- and middle-income 30 w 25 w 53 w 20 w 2w 16w 17w 41w 5w 11wSub-Saharan Africa 34 w 48 w 58 w 40 w 1w 2w 6w lOw OwEast Asia 17w 12 w 58 w 15w 2w 21w 21w 52w 2w 14wSouth Asia 6w 8w 57 w 28 w 1w 8w 36w 56w 27w 23wEurope, M.East, & N.AfricaLatin America & Caribbean w 39w w 1w 13w 6w 20w 1w 3w

17 highly indebted 38 w 38w 51 w 25 w 3 w 14 w 8 w 24 w 1 w 3 w

High-income economies 11 w 9w 20 w 12 w 30 w 39w 39 w 39 w 7 w 5 wOECD members 9 w 7 w 21 w 12 w 31 w 41 w 39 w 39w 7 w S w

tOther 57 w 36w 14 w 6 w 4 w 19w 26w 38w 11 w 14w

Percentage share of merchandise exports

Fuels,minerals,

and metals

Other Machinery andprimary transport

commodities equipmentOther

manufactures(Textiles

and clothing)

1965 1987 1965 1987 1965 1987 1965 1987 1965 1987

68 Pem 45 71 54 11 0 3 1 16 069 Mauritius 0 0 100 59 0 2 0 38 070 Jordan 27 30 54 14 11 14 7 4171 CostaRica 0 1 84 59 1 7 15 33 272 Syrian Arab Rep. 7 46 83 28 1 3 9 24 7

73 Malaysia 35 25 59 36 2 27 4 13 0 374 Mexico 22 44 62 9 1 28 15 19 3 275 South Africa" 24 12 44 9 3 3 29 75 1

76 Poland . . 19 . . 14 . . 33 . . 34 . . 577 Lebanon 13 . . 53 . 14 20 2

Table 17. OECD unports of manufactured goods: origin and composition

Note: For data comparability and coverage, see the technical notes.

196

Value of imports ofmanufactures, by origin

(millions ofdollars)

Composition of 1987 imports ofmanufactures by high-income OECD countries (percent)

ElectricalTextiles and machinery and Transport

1967 1987 clothing Chemicals electronics equipment Others

Low-income economies 1,168 t 28,141 t 48 w 7 w 3 w 2 w 40wChina and India 694 t 19,843 t 49w 7 w 4 w 1 w 40 wOther low-income 473 t 8,298 I 48 w 7 w 2 w 3 w 40 w

1 Ethiopia I 39 17 8 12 1 622 Bhutan 0 0 24 3 22 0 513Chad 0 1 4 0 2 78 154 Zaire 32 294 0 5 0 0 955 Bangladesh 696 84 0 0 0 16

6Malawi 0 13 87 0 2 2 97 Nepal 2 118 88 0 1 0 118 Lao PDR 0 2 49 8 1 0 429 Mozambique 3 6 6 5 7 8 74

10 Tanzania 0 4 3 0 31 2 65

11 BurkinaFaso 6 33 60 17 2 1 2012 Madagascar 0 12 2 3 10 I 8513 Mali 36 34 57 1 4 3714 Burundi 3 2 2 1 3 0 9415 Zambia 2 27 22 0 4 0 74

16 Niger 0 376 0 98 0 0 217 Uganda I 3 17 7 38 9 2918 China 193 14,306 49 9 5 1 3619 Somalia 1 4 1 0 14 3 822OTogo 0 14 3 0 0 2 95

21 India 501 5,537 46 3 1 0 4922 Rwanda 0 1 6 4 34 3 5323 Sierra Leone 72 64 0 0 0 0 9924 Benin 0 3 24 2 1 0 7225 Central African Rep. 9 46 0 0 0 0 100

26 Kenya 16 90 6 4 13 2 7427 Sudan 1 17 26 8 7 IS 4428 Pakistan 123 1,884 79 0 0 0 2129 Haiti 9 405 45 2 18 0 3530 Lesotho5 .

31 Nigeria 15 93 9 20 5 2 6432 Ghana 13 33 1 1 4 3 9133 Sri Lanka 7 775 76 1 0 4 2034 Yemen,PDR 5 3 8 1 8 11 7335 Mauritania 0 3 31 14 6 1 48

36 Indonesia 18 2,599 33 4 1 2 6037 Liberia 33 345 0 0 0 48 5138 Afghanistan 9 57 91 0 0 1 839 Burma 2 18 29 3 I 1 6640 Guinea 27 107 0 45 0 0 55

41 Kampuchea,Dem. 1 1 38 0 14 0 4842 VietNam 2 0

Middle-income economies 2,816 t 152,017 t 25 w 5 w 17 w 6 w 48 wLower-middle-income 1,269 t 42,398 t 26 w 6 w 23 w 7 w 38 w

43 Senegal 6 31 9 24 7 28 3244 Bolivia 2 15 44 8 0 5 4245 Zimbabwe 13 440 9 0 0 0 9146 Philippines 97 3,119 34 3 30 0 3247 Yemen Arab Rep. 0 7 1 1 28 5 64

48 Morocco 16 1,191 67 15 6 1 II49 Egypt, Arab Rep. 19 520 68 3 2 1 2750 PapuaNewGuinea 3 28 3 0 4 31 6251 Dominican Rep. 6 846 47 1 7 0 4552 Côted'Ivoire 4 186 24 3 1 2 70

53 Honduras 2 86 53 2 0 1 4454 Nicaragua I 3 2 14 7 2 7455 Thailand 20 3,919 33 2 14 0 5056 ElSalvador I 89 49 1 31 0 1957 Congo, People's Rep. 8 79 0 0 2 12 86

58 Jamaica 48 474 40 54 1 0 459 Guatemala 4 86 67 9 0 3 2060 Cameroon 2 58 28 1 3 2 6561 Paraguay 4 38 14 19 0 0 6662 Ecuador 3 40 14 6 5 1 74

63 Botswanaa . . . . . . . . . . .

64 Tunisia 12 1,208 64 15 7 1 1365 Turkey 18 3,743 77 5 1 1 1666 Colombia 23 573 26 5 0 1 6867 Chile 11 228 9 33 2 3 53

Note: Includes only high-income OECD economies, a. Figures are for South Africa, Bostwana and Lesotho. b. Includes Luxembourg.

197

Low- and middle-income 3,984 180,158 28 w 5w 14w 6w 46 wSub-Saharan Africa 318 r 3,145 20 w 18w 2w 6w 54 wEast Asia 682 t 104,3241 26 w 3w 17w 4w 50 wSouth Asia 634 t 9,040 59 w 2w 1w 1w 38 wEurope, MEast, & N.Africa 1,232 31,442 I 46 w 9w 6w Sw 34 wLatin America & Caribbean 664 t 29,764 11w 8w 20 w 13 w 47 w

17 highly indebted 890 1 37,392 I 16 w 7 w 20w 12 w 45 w

High-income economies 74,378 t 1,071,178 r 7 w 13 w 11 w 20 w 50 wOECD members 72,982 1 1,030,645 I 6 w 13 w 11 w 21w 50 w

'(Other 1,396 t 40,533 t 26w 7w 18w 1w 48 w

96 Spain 351 18,276 6 10 7 27 5197 Ireland 310 9,662 8 22 12 1 5798 '(Saudi Arabia 3 1,263 0 61 6 1 3299 '(Israel 195 5,472 10 14 10 3 63

100 New Zealand 69 1,312 12 20 7 3 57

101 '(Singapore 22 10,265 8 5 34 I 52102 '(Hong Kong 1,073 21,753 42 1 15 0 42103 Italy 4,710 78,348 18 8 7 10 57104 United Kingdom 7,470 70,427 6 18 10 12 55105 Australia 308 4,265 2 33 5 10 49

106 Belgium1' 4,496 56,557 9 20 6 20 45107 Netherlands 3,385 47,039 8 31 9 7 45108 Austria 925 19,002 II 9 12 6 63109 France 5,526 85,237 7 18 9 21 45110 Germany, Fed. Rep. 14,220 205,842 5 14 10 23 47

Ill Finland 664 12,035 5 7 8 6 74112 '(Kuwait 5 141 0 25 8 14 52113 Denmark 894 12,810 9 15 12 4 60114 Canada 4,925 55,448 7 6 40 45115 Sweden 2,705 31,648 2 8 9 21 60

116 Japan 4,568 148,150 2 3 17 33 45117 '(United Arab Emirates 0 355 9 19 7 6 60118 Norway 747 6,026 3 22 9 8 58119 UnitedStates 14,257 133,127 2 13 13 21 51120 Switzerland 2,450 35,296 6 20 11 2 60

Total reporting economies 78.362t 1,251,3361 lOw 12 w 11 w 18 w 49wOil exporters 1,240 t 28,203 t 10 w 13 w 20 w 10 w 47 w

Nonreporting nonmemberu 9551 7,866t lOw 23w 6w 9w 53w

Value of imports ofmanufactures, by origin

(millions ofdollars)

Composition of 1987 imports ofmanufactures by high-income OECD countries (percent)

Textiles andElectrical

machinery and Transport1967 1987 clothing Chemicals electronics equipment Others

68 Peru 7 297 56 6 3 0 3569 Mauritius 0 526 85 0 1 0 1470 Jordan 1 138 2 40 9 3 4671 Costa Rica 1 303 66 2 11 1 2072 SyrianArabRep. 2 26 19 1 7 4 69

73 Malaysia 24 4,553 16 3 60 0 2074 Mexico 232 14,708 5 4 33 16 4275 South Africau 453 2,444 5 18 2 2 7376 Poland 214 2,140 23 15 5 13 4477 Lebanon 12 131 12 3 2 3 80

Upper-middle-income 1,547 1 109,619 24w 4w 14w 6w 51w

78 Brazil 102 8,610 9 8 9 15 5879 Uruguay 11 301 57 2 0 0 4180 Hungary 112 2,030 26 20 9 3 4281 Panama 24 479 10 4 1 35 5082 Argentina 59 1,083 12 18 1 2 67

83 Yugoslavia 235 5,711 28 8 9 13 4284 Algeria 14 176 0 42 2 5 5185 Korea, Rep. 150 33,247 27 2 18 8 4586 Gabon 8 123 0 58 1 2 3987 Portugal 314 7,361 42 6 8 5 39

88 Venezuela 24 461 2 24 2 4 6789 Greece 63 3,312 67 3 3 1 2790 Trinidad and Tobago 33 240 0 69 0 1 3091 Libya 5 165 0 89 1 1 992 Oman 1 82 1 1 26 2 71

93 Iran, Islamic Rep. 95 619 86 0 1 0 1394 Iraq 6 141 1 13 6 6 7495 Romania 65 2,030 33 8 3 4 52

Table 18. Balance of payments and reserves

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

198

Current account balance(millions ofdollars) Net

workers'remittances

(millions ofdollars)

Net directprivate investment(millions ofdollars)

Gross international reserves

Afterofficial

transfers

Beforeofficial

transfers

In

Millions ofdollarscove

ofmonthsimport

rage19871970 1987 1970 1987 1970 1987 1970 1987 1970 1987

Low-income economies 3,673 t 50,173 t 4.5 wChina and India 1,023 t 33,965 t 6.4wOther low-income 2,650 t 16,208 t 2.7 w

1 Ethiopia -32 -264" -43 -475' 4 . 72 245 2.32 Bhutan . . -56 . . -56 . . . . .. . . . . 0

3 Chad 2 -83 -33 -324 -6 -26 1 4 2 57 1.44 Zaire -64 -705 -141 -851 -98 . . 42 10 189 417 1.85 Bangladesh -114' -309 -234 -966 0 617 2 876 3.5

6 Malawi -35 -24 -46 -53 -4 9 29 58 1.87 Nepal 8' -133 -16" -194 . . . . 94 251 4.98 LaoPDR -114" -141" . . . . 69 Mozambique . 372a -676' 33" . . .

10 Tanzania -36 _128a 37 -605" . . . . . . 65 32 0.311 BurkinaFaso 9 -124 -21 -124 16 110 0 . . 36 328 4.412 Madagascar 10 -135" -42 -241" -26 . . 10 . . 37 185 3.113 Mali -2 -111 -22 -313 -1 26 -1 4 1 25 0.514 Bunindi 2' -132" -8" _l85a . . 0" 2" 15 69 2.815 Zambia 108 21 107 -12 -48 1 -297 515 111 1.4

16 Niger 0 -67 -32 -201 -3 -43 0 . . 19 254 6.417 Uganda 20 -107 19 -200 -5 . . 4 1 57 55 1.018 China5 -81' 300 -81" 171 166 . . 1,669 . . 22,453 6.719 Somalia -6 248' -18 -59' . . . . 5 . . 21 17 0.420 Togo 3 -73 -14 -147 -3 1 0 12 35 361 7.3

21 India _386a -3,750" -592" -4,068' 65" 2,000" 0" 253" 1,023 11,512 5.922 Rwanda 7 -131 -12 -250 -4 -15 0 23 8 164 4.623 SierraLeone -16 -5 -20 -9 0 0 8 -6 39 6 1.024 Benin 3 -208 -23 -223' 0 37a 7 . . 16 9 0.225 CentralAfrican Rep. -12 _96a -24 -214' -4 -24' 1 20" 1 102 3.2

26 Kenya -49 -497 -86 -639 . . 14 . . 220 294 1.427 Sudan -42 -422" -43 _702a . -1 . . 22 12 0.128 Pakistan -667 -336 -705 -719 86 2,172 23 62 195 1,441 2.229 Haiti 2 -31 -5 -158 13 58 3 5 4 26 0.630 Lesotho 18' -12 -1" -16 29a . 2 . . 68 1.9

31 Nigeria -368 -380 -412 -380 . . . . 205 386 223 1,498 2.332 Ghana -68 -275 -76 -275 -9 -2 68 5 43 332 3.033 SriLanka -59 -378 -71 -572 3 348 0 29 43 310 1.434 Yemen,PDR -4 -122 -4 -178 52 303 -1 . . 59 117 2.135 Mauritania -5 -73" -13 -164' -6 2" 1

5 3 77 1.5

36 Indonesia -310 -1,837 -376 -2,098 . . 112 83 425 160 7,095 3.937 Liberia -16" -118 _27a -163 _18a -51 28' 39 . . 1 0.038 Afghanistan . . -556 . . -748 . . . . . . 49 747 5.639 Burma -63 _208a -81 -307' . . . . 98 149 2.740 Guinea -53" -114" . .

5a

41 Kampuchea, Dem.42 VietNam

Middle-income economies 16,606 t 133,497 r 3.5 wLower-middle-income 7,024 t 64,672 3.4 w

43 Senegal -16 -316' -66 -608' -16 10" 5 -50" 22 23 0.144 Bolivia 4 -485 2 -597 . . 1 -76 22 46 530 5.245 Zimbabwe -14' 50 -13' -22 . . . . . . -24 59 370 2.746 Philippines -48 -539 -138 -736 0 211 -29 186 255 2,312 2.747 Yemen Arab Rep. -34" -607" -52" _607a 45" 428" -10' 540 3.7

48 Morocco -124 164 -161 164 27 1,587 20 57 142 752 1.549 Egypt, Arab Rep. -148 -2,705" -452 -3,757" 29 2,845" 869" 165 2,556 2.150 Papua New Guinea -89' -326 -239' -530 . . . . . . 71 . . 467 3.251 DominicanRep. -102 -119 -103 -148 25 242 72 50 32 191 2.552 Côted'Ivoire -38 -624' -73 -64P -56 31 119 30 0.1

53 Honduras -64 -183 -68 -330 . . 8 36 20 114 1.054 Nicaragua -40 -693 -43 -799 3 15 . . 49 .

55 Thailand -250 -586 -296 -723 . . . . 43 270 911 5,206 4.156 ElSalvador 9 l27 7 -196' . . . . 4 -41" 64 413 3.757 Congo, People's Rep. -45" -245 53a -298 3" -39 30" -40 9 9 0.1

58 Jamaica -153 -96 -149 -160 29 44 161 -5 139 174 1.159 Guatemala -8 -464 -8 -555 . . . . 29 152 79 541 3.560 Cameroon -30 _l,ll2a -47 -1,112" -11 3" 16 31" 81 78 0.361 Paraguay -16 _411a -19 -422" . . 4 9" 18 514 4.262 Ecuador -113 -1,176 -122 -1,251 . . 89 75 76 692 2.4

63 Botswana -30" 597 -35" 458 . . -29 6" 125 . . 2,057 17.664 Tunisia -53 -62 -88 -99 20 486 16 92 60 616 1.965 Turkey -44 -984 -57 -1,335 273 2,021 58 110 440 3,444 2.366 Colombia -293 255 -333 255 6 616 39 349 207 3,416 5.267 Chile -91 -811 -95 -871 -79 97 392 3,244 5.2

* Data forTaiwan, China are: I 17,925 2 17,917 61 14 627 80,460 22.5

Current account balance(millions of dollars)

Networkers'

remittances(millions of dollars)

Net directprivate investment(millions of dollars)

Gross international reserves

Afterofficial

transfers

Beforeofficial

transfers

In

Millions of dollars

mont/u

19871970 /987 1970 1987 1970 1987 1970 1987 1970 1987

68 Peru 202 -1,914 146 -1,419 -70 22 339 1,319 3.269 Mauritius 8 72 5 47 2 44 46 362 3.570 Jordan -20 -350 -130 -350 844 33 258 910 2.671 Costa Rica -74 -225 -77 -377 65 16 519 3.372 Syrian Arab Rep. -69 -465 -72 -1,365 250 57 403 1.3

73 Malaysia 8 2,336 2 2,170 94 575 667 8,573 5.574 Mexico -1,068 3,884 -1,098 3,509 323 3,248 756 13,692 6.275 South Africa -1,215 3,027 -1,253 2,911 318 28 1,057 3,463 1.976 Poland -578 . . -578 1,723 1.477 Lebanon 405 4,832

Upper-middle-income 9,582 I 68,852 t 3.7 w

78 Brazil -837 -1,275 -861 -1,275 407 582 1,190 7,477 3.079 Unsguay -45 -124 -55 -132 -5 186 1,793 12.080 Hungary -61 -676 -61 -676 . 697 3,067 2.981 Panama -64 342 -79 229 33 -72 16 78 0.282 Argentina -163 -4,285 -160 -4,285 II -19 682 3,734 3.5

83 Yugoslavia -372 819 -378 819 441 3,721 143 1,602 1.284 Algeria -125 -406 -163 -406 178 434 45 -20 352 4,343 4.585 Korea, Rep. -623 9,854 -706 9,835 . . . . 66 418 610 3,739 0.986 Gabon -3 -210 -15 -231 -8 -143 -1 121 15 18 0.187 Portugal - t58a 641 - 158a 309 523k 3,243 iSa 306 1,565 13,039 9.9

88 Venezuela -104 -1,125 -98 -1,103 -87 -34 -23 21 1,047 11,510 10.189 Greece -422 -1,298 -424 -2,963 333 1,334 50 683 318 4,299 3.690 Trinidad and Tobago -109 -184 -104 -184 3 . . 83 -22 43 214 2.891 Libya 645 -54 758 -13 -134 -446 139 -80 1,596 7,581 15.492 Oman -966 -966 -849 138 13 1,542 3.6

93 Iran, Islamic Rep. -507 -511 25 21794 Iraq 105 . . 104 24 47295 Roenania -23 1,489 -23 1,489 1,851 1.9

Low- and middle-income 20,279 t 183,670 1 3.8 wSub-Saharan Africa 2,0281 8,0301 2.1 wEast Asia 2,885 r 50,401 t 3.9 wSouth Asia 1,453 1 14,547 1 4.6 wEurope, M.East, & N.Africa 7,375 t 56,700 t 3.4 wLatin America & Caribbean 5,481 1 50,5291 4.7w

17 highly indebted 5,9581 54,2951 4.1 w

High-income economies 75,457 t 892,235 t 4.2 wOECD members 72,938t 832,318t 4.1 w

tOther 2,5191 59,9171 6.0 w

96 Spain 79 -51 79 -412 469 1,210 179 3,814 1,851 36,439 7.497 Ireland -198 391 -228 -1,087 32 . . 698 4,970 3.098 tSaudi Arabia 71 -9,571 152 -6,270 - 183 -4,935 20 -1,175 670 24,909 7.999 tlsrael -562 -999 -766 -4,495 40 148 452 6,368 3.9

100 New Zealand -232 -1,368 -222 -1,304 16 221 137 104 258 3,270 3.5

101 tSingapore -572 539 -585 561 93 982 1,012 15,227 5.0102 tHong Kong 225 1,199 225 1,199 282 . . . .103 Italy 774 -1,059 1,096 1,213 446 1,214 498 1,742 5,547 62,489 4.8104 United Kingdom 1,913 -2,621 2,316 2,738 -190 -16,345 2,918 50,918 2.4105 Australia -777 -8,688 -682 -8,611 778 57 1,709 12,584 3.5

106 Belgiumb 717 2,920 904 4,203 39 4 140 -411 2,947 25,899 2.6107 Netherlands -483 3,372 -511 4,427 -49 -236 -15 -5,505 3,362 37,275 3.8108 Austria -75 -226 -73 -155 -7 257 104 134 1,806 17,769 4.7109 France -204 -4,088 18 -1,030 -641 -2,055 248 -4,000 5,199 72,675 4.0110 Germany, Fed. Rep. 852 44,956 1,899 55,599 -1,366 -3,673 -303 -7,064 13,879 124,834 5.0

111 Finland -239 -1,938 -232 -1,633 -41 -809 455 7,364 3.5112 tKuwait 853 4,414 853 4,572 -1,102 -93 209 5,371 6.8113 Denmark -544 -2,951 -510 -2,798 75 . . 488 10,854 3.3114 Canada 1,056 -7,963 739 -7,498 566 -922 4,733 16,242 1.6115 Sweden -265 -853 -160 160 -16 -104 -2,844 775 11,112 2.4

116 Japan 1,980 87,660 2,160 90,410 -260 -18,330 4,876 92,702 5.2117 tUnited Arab Emirates 75 6,486 75a 6,486 4a

. 5,121 5.7118 Norway -242 -4,111 -200 -3,337 -55 32 -846 813 14,850 5.0119 United States 2,330 -153,950 4,680 -141,760 -650 -890 -6,130 -2,470 15,237 161,738 3.4120 Switzerland 72 5,879 114 5,834 -313 -1,413 . . 26 5,317 67,791 10.2

Total reporting economies 95,736 tl,075,906 t 4.1 wOil exporters 7,082 t 103,724 t 5.4 w

Nonreporting nonmembers

a. World Bank estimates. b. Includes Luxemboure.

199

Table 19. Official development assistance from OECD & OPEC members

200

Amount

1965 1970 1975 1980 1983 1984 1985 1986 1987 1988

OECD Millions of US dollars97 Ireland 0 0 8 30 33 35 39 62 51 57

100 New Zealand 14 66 72 61 55 54 75 87 104103 Italy 60 147 182 683 834 1,133 1,098 2,404 2,615104 UnitedKingdom 472 500 904 1,854 1,610 1,429 1,530 1,737 1,865 2,615105 Australia 119 212 552 667 753 777 749 752 627 1,091

106 Belgium 102 120 378 595 479 446 440 547 689 592107 Netherlands 70 196 608 1,630 1,195 1,268 1,136 1,740 2,094 2,231108 Austria 10 11 79 178 158 181 248 198 196 302109 France 752 971 2,093 4,162 3,815 3,788 3,995 5,105 6,525 6,959110 Germany, Fed. Rep. 456 599 1,689 3,567 3,176 2,782 2,942 3,832 4,391 4,700111 Finland 2 7 48 110 153 178 211 313 433 610113 Denmark 13 59 205 481 395 449 440 695 859 922114 Canada 96 337 880 1,075 1,429 1,625 1,631 1,695 1,885 2,340115 Sweden 38 117 566 962 754 741 840 1,090 1,337 1,534116 Japan 244 458 1,148 3,353 3,761 4,319 3,797 5,634 7,454118 Norway 11 37 184 486 584 540 574 798 890 988119 UnitedStates 4,023 3,153 4,161 7,138 8,081 8,711 9,403 9,564 8,945 12,170120 Switzerland 12 30 104 253 320 285 302 422 547 615

Total 6,480 6,968 13,847 27,297 27,592 28,742 29,429 36,663 41,531 49,730OECD As a percentage of donor GNP97 Ireland 0.00 0.00 0.09 0.16 0.20 0.22 0.24 0.28 0.28 0.20

100 New Zealand . 0.23 0.52 0.33 0.28 0.25 0.25 0.30 0.26 0.27103 Italy 0.10 0.16 0.11 0.15 0.20 0.28 0.26 0.40 0.35104 United Kingdom 0.47 0.41 0.39 0.35 0.35 0.33 0.33 0.31 0.28 0.32105 Australia 0.53 0.59 0.65 0.48 0.49 0.45 0.48 0.47 0.33 0.46106 Belgium 0.60 . 0.46 0.59 0.50 0.59 0.58 0.55 0.48 0.49 0.39107 Netherlands 0.36 0.61 0.75 0.97 0.91 1.02 0.91 1.01 0.98 0.98108 Austria 0.11 0.07 0.21 0.23 0.24 0.28 0.38 0.21 0.17 0.24109 France 0.76 0.66 0.62 0.63 0.74 0.77 0.78 0.70 0.74 0.73110 Germany, Fed. Rep. 0.40 0.32 0.40 0.44 0.48 0.45 0.47 0.43 0.39 0.39ill Finland 0.02 0.06 0.18 0.22 0.32 0.35 0.40 0.45 0.50 0.59113 Denmark 0.13 0.38 0.58 0.74 0.73 0.85 0.80 0.89 0.88 0.89114 Canada 0.19 0.41 0.54 0.43 0.45 0.50 0.49 0.48 0.47 0.50115 Sweden 0.19 0.38 0.82 0.78 0.84 0.80 0.86 0.85 0.88 0.87116 Japan 0.27 0.23 0.23 0.32 0.32 0.34 0.29 0.29 0.31118 Norway 0.16 0.32 0.66 0.87 1.10 1.03 1.01 1.17 1.09 1.12119 United States 0.58 0.32 0.27 0.27 0.24 0.24 0.24 0.23 0.20 0.25120 Switzerland 0.09 0.15 0.19 0.24 0.31 0.30 0.31 0.30 0.31 0.32OECD National currencies97 Ireland (millions of pounds) 0 0 4 15 26 32 37 46 34

100 New Zealand (millions of dollars) . . 13 55 74 91 95 109 143 146103 Italy (billions of lire) 38 92 119 585 1,267 1,991 2,097 3,578 3,389104 UnitedKingdom(millionsofpounds) 169 208 409 798 1,062 1,070 1,180 1,194 1,151105 Australia(millionsofdollars) 106 189 402 591 802 873 966 1,121 895

106 Belgium(millionsoffrancs) 5,100 6,000 13,902 17,399 24,390 25,527 26,145 24,525 25,835107 Netherlands (millions of guilders) 253 710 1,538 3,241 3,411 4,069 3,773 4,263 4,242108 Austria (millions of schillings) 260 286 1,376 2,303 2,838 3,622 5,132 3,023 2,478109 France(millionsoffrancs) 3,713 5,393 8,971 17,589 29,075 33,107 35,894 35,357 39,218110 Germany, Fed. Rep. (millions

ofdeutschemarks) 1,824 2,192 4,155 6,484 8,109 7,917 8,661 8,323 8,004Ill Finland(millionsofmarkkaa) 6 29 177 414 852 1,070 1,308 1,587 1,902113 Denmark (millions of kroner) 90 443 1,178 2,711 3,612 4,650 4,657 5,623 5,848114 Canada(millionsofdollars) 104 353 895 1,257 1,761 2,104 2,227 2,354 2,493115 Sweden(millionsofkronor) 197 605 2,350 4,069 5,781 6,129 7,226 7,765 8,477116 Japan(billionsofyen) 88 165 341 760 893 1,026 749 950 1,078

118 Norway (millions of kroner) 79 264 962 2,400 4,261 4,407 4,946 5,901 5,998119 United States (millions of dollars) 4,023 3,153 4,161 7,138 8,081 8,711 9,403 9,564 8,945120 Switzerland (millions of francs) 52 131 268 424 672 672 743 759 815OECD Summary

ODA(billionsofUSdollars, nominalprices) 6.48 6.97 13.86 27.30 27.59 28.74 29.43 36.66 41.53 49.73ODAaspercentageofGNP 0.48 0.34 0.35 0.37 0.36 0.36 0.35 0.35 0.35 .

ODA (billions of US dollars,constant 1980 prices) 20.90 18.34 22.00 27.30 27.87 29.03 29.14 30.55 30.76

GNP (trillions of US dollars, nominal prices 1.35 2.04 3.96 7.39 7.70 8.03 8.49 10.39 12.02GDPdeflatorE 0.31 0.38 0.63 0.99 0.99 0.99 1.01 1.35 .

a. Preliminary estimates. b. See the technical notes.

201

Net bilateral flows to low-income economies

1965 1970 1975 1980 1982 1983 1984 1985 1986 1987

OECD As a percentage of donor GNP

97 Ireland 0.02 0.03 0.03 0.05 0.06 0.06100 New Zealand 0.14 0.01 0.00 0.00 0.00 0.00 0.00 0.06103 Italy 0.04 0.06 0.01 0.01 0.04 0.05 0.09 0.12 0.16 0.17104 United Kingdom 0.23 0.15 0.11 0.11 0.07 0.10 0.09 0.09 0.09 0.09105 Australia 0.08 0.09 0.10 0.04 0.07 0.05 0.06 0.05 0.04 0.08

106 Belgium 0.56 0.30 0.31 0.24 0.21 0.21 0.20 0.23 0.20 0.18107 Netherlands 0.08 0.24 0.24 0.30 0.31 0.26 0.29 0.27 0.32 0.41108 Austria 0.06 0.05 0.02 0.03 0.01 0.02 0.01 0.02 0.01 0.03109 France 0.12 0.09 0.10 0.08 0.10 0.09 0.14 0.14 0.13 0.17110 Germany, Fed. Rep. 0.14 0.10 0.12 0.08 0.12 0.13 0.11 0.14 0.12 0.13

111 Finland 0.06 0.08 0.09 0.12 0.13 0.17 0.18 0.20113 Denmark 0.02 0.10 0.20 0.28 0.26 0.31 0.28 0.32 0.32 0.35114 Canada 0.10 0.22 0.24 0.11 0.14 0.13 0.15 0.15 0.12 0.16115 Sweden 0.07 0.12 0.41 0.36 0.38 0.33 0.30 0.31 0.38 0.29116 Japan 0.13 0.11 0.08 0.08 0.11 0.09 0.07 0.09 0.10 0.13

118 Norway 0.04 0.12 0.25 0.31 0.37 0.39 0.34 0.40 0.47 0.42119 United States 0.26 0.14 0.08 0.03 0.02 0.03 0.03 0.04 0.03 0.06120 Switzerland 0.02 0.05 0.10 0.08 0.09 0.10 0.12 0.12 0.12 0.14

Total 0.20 0.13 0.11 0.07 0.08 0.08 0.07 0.09 0.09 0.12

Amount

1976 1979 1980 1981 1982 1983 1984 1985 1986 1987

OPEC Mfflions of US dollars

31 Nigeria 80 29 35 143 58 35 51 45 52 3084 Algeria 11 281 81 55 129 37 52 54 114 2688 Venezuela 109 110 135 92 125 142 90 32 85 2493 Iran, Islamic Rep. 751 -20 -72 -141 -193 10 52 -72 69 -1094 Iraq 123 658 864 207 52 -10 -22 -32 -21 -3598 SaudiArabia 2,791 3,941 5,682 5,514 3,854 3,259 3,194 2,630 3,517 2,888

112 Kuwait 706 971 1,140 1,163 1,161 997 1,020 771 715 316117 UnitedArabEmirates 1,028 968 1,118 805 406 351 88 122 91 19

91 Libya 98 145 376 257 44 144 24 57 68 76Qatar 180 282 277 246 139 20 10 8 19 4

Total OAPEC 4,937 7,246 9,538 8,247 5,785 4,798 4,366 3,655 4,503 3,294Total OPEC 5,877 7,365 9,636 8,341 5,775 4,983 4,559 3,614 4,708 3,338

OPEC As a percentage of donor GNP31 Nigeria 0.19 0.04 0.04 0.19 0.08 0.05 0.07 0.06 0.11 0.1384 Algeria 0.07 0.90 0.20 0.13 0.31 0.08 0.10 0.10 0.18 0.0488 Venezuela 0.35 0.23 0.23 0.14 0.19 0.22 0.19 0.07 0.17 0.0693 Iran, Islamic Rep. 1.16 -0.02 -0.08 -0.13 -0.15 0.01 -0.01 -0.08 0.03 -0.0194 Iraq 0.76 1.97 2.36 0.94 0.18 -0.09 -0.05 -0.08 0.04 0.06

98 SaudiArabia 5.95 5.16 4.87 3.45 2.50 2.86 3.44 2.86 4.52 3.40112 Kuwait 4.82 3.52 3.52 3.65 4.34 3.73 3.82 3.25 2.99 1.23117 UnitedArabEmirates 8.95 5.08 4.06 2.57 1.39 1.30 0.32 0.29 0.34 0.08

91 Libya 0.66 0.60 1.16 0.81 0.15 0.51 0.08 0.58 0.13 0.30Qatar 7.35 6.07 4.16 3.50 2.13 0.39 0.17 0.18 0.08 0.08

Total OAPEC 4.23 3.31 3.22 2.52 1.81 1.70 1.60 1.39 1.80 1.10Total OPEC 2.32 1.75 1.79 1.45 0.98 0.86 1.13 0.65 0.95 0.79

Table 20. Official development assistance: receipts

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

202

NeidisbursementofODA from all sources

Millions of dollars Per capita(dollars)

Aa a percentageof GNP

1981 1982 1983 1984 1985 /986 1987 1987 1987

Low-income economies 12,514 t 12,721 t 12,208 I 12,277 t 13,703 t 16,522 18,120 t 6.4 w 2.3 wChina and India 2,4591 2,168t 2,5091 2,471 t 2,532 t 3,2581 3,301 t 1.8w 0.6wOther low-income 10,055 t 10,553 t 9.6991 9,806t 11,171 t 13,265 t 14,819 t 15.6w 6.1 wI Ethiopia 245 200 339 364 715 636 635 14.3 11.82 Bhutan 10 11 13 18 24 40 42 31.3 16.73 Chad 60 65 95 115 182 165 198 37.6 20.34 Zaire 394 348 315 312 325 448 621 19.0 10.75 Bangladesh 1,104 1,341 1,049 1,200 1,152 1,455 1,637 15.4 9.36 Malawi 137 12! 117 158 113 198 280 35.5 22.87 Nepal 181 200 201 198 236 301 345 19.6 12.78 Lao PDR 35 38 30 34 37 48 59 15.6 8.49 Mozambique 144 208 211 259 300 422 649 44.6 40.9

10 Tanzania 703 684 594 558 487 681 882 36.9 25.211 BurkinaFaso 217 213 184 189 198 284 283 34.1 16.212 Madagascar 234 242 183 153 188 316 327 30.0 15.813 Mali 230 210 215 320 380 372 364 46.9 18.614 Burundi 121 127 140 141 142 187 192 38.5 15.315 Zambia 232 317 217 239 328 464 429 59.5 21.1

16 Niger 194 257 175 161 304 307 348 51.2 16.117 Uganda 136 133 137 163 182 198 276 17.6 7.218 China 477 524 669 798 940 1,134 1,449 1.4 0.519 Somalia 374 462 343 350 353 511 580 101.6 57.020 Togo 63 77 112 110 114 174 123 38.0 10,021 India 1,983 1,644 1,840 1,673 1,592 2,124 1,852 2.3 0.722 Rwanda 153 151 150 165 181 211 243 37.7 11.623 Sierra Leone 60 82 66 61 66 87 68 17.8 7.324 Beam 82 81 86 77 96 138 136 31.5 8.125 CentralAfricanRep. 102 90 93 114 104 139 173 63.7 16.1

26 Kenya 449 485 400 411 438 455 565 25.6 7.027 Sudan 632 740 962 622 1,128 945 902 39.0 10.528 Pakistan 823 916 735 749 801 967 858 8.4 2.429 Haiti 107 128 134 135 153 175 218 35.4 9.730 Lesotho 104 93 108 101 94 88 108 66.5 29.431 Nigeria 41 37 48 33 32 59 69 0.6 0.332 Ghana 145 141 110 216 203 371 373 27.5 7.433 SriLanka 377 416 473 466 484 570 502 30.7 7.534 Yemen,PDR 87 143 106 103 113 71 80 35.2 8.135 Mauritania 214 187 176 175 207 221 178 95.6 19.036 Indonesia 975 906 744 673 603 711 1,245 7.3 1.837 Liberia 108 109 118 133 90 97 78 33.6 6.938 Afghanistan 23 9 14 7 17 2 45 2.439 Burma 283 319 302 275 356 416 364 9.340 Guinea 106 90 68 123 119 175 214 33.041 Kampuchea,Dem. 130 44 37 17 13 13 14 1.842 VietNam 242 136 106 110 114 147 116 1.8

Middle-income economiesLower-middle-income

11,895110,784 t

10,09219,460 I

9,50219,044 I

9,839 t9,307 1

10,032 t9,396 I

11,121110,280

12,219 I11,1671

13.4 w20.9w

0.8 w1.8w

43 Senegal 398 285 323 368 295 567 642 92.4 13.644 Bolivia 169 148 174 172 202 322 318 47.3 7.145 Zimbabwe 212 216 208 298 237 225 295 32.6 5.046 Philippines 376 333 429 397 486 956 775 13.3 2.247 YemenArabRep. 411 412 328 326 283 262 349 41.2 8.248 Morocco 1,037 774 398 352 785 419 401 17.2 2.449 Egypt, Arab Rep. 1,292 1,441 1,463 1,794 1,791 1,717 1,766 35.2 4.950 PapuaNewGuinea 336 311 333 322 259 263 322 87.0 10.651 Dominican Rep. 105 136 100 188 207 93 130 19.3 2.652 Côted'Ivoire 124 137 156 128 125 186 254 22.8 2.553 Honduras 109 158 190 286 272 283 258 55.0 6.454 Nicaragua 145 121 120 114 102 150 141 40.2 4.455 Thailand 406 389 431 474 481 496 506 9.4 1.156 Elsalvador 167 218 290 261 345 341 426 86.4 9.057 Congo,People's Rep. 81 93 108 98 71 110 152 75.2 7.058 Jamaica 155 180 181 170 169 178 169 70.4 5.959 Guatemala 75 64 76 65 83 135 241 28.5 3.460 Cameroon 199 212 129 186 159 224 213 19.6 1.761 Paraguay 54 85 51 50 50 66 82 20.9 1.862 Ecuador 59 53 64 136 136 147 203 20.5 1.9

63 Botswana 97 101 104 102 96 102 154 135.6 10.164 Tunisia 239 210 205 178 163 223 282 37.0 2.965 Turkey 728 647 356 242 179 339 417 7.9 0.666 Colombia 102 97 86 88 62 63 78 2.6 0.267 Chile -7 -8 0 2 40 -5 21 1.7 0.1

203

Net disbursement of ODA from all sources

Millions of dollarsPer capita

(dollars)1987

As a percentageof GNP

19871981 1982 1983 1984 1985 1986 1987

68 Pem 233 188 297 310 316 272 292 14.4 0.669 Mauritius 58 48 41 36 28 56 65 62.5 3.770 Jordan 1,065 798 787 687 540 565 595 157.0 12.071 Costa Rica 55 80 252 218 280 196 228 87.5 5.372 SyrianArabRep. 1,500 962 813 641 610 728 697 61.9 2.9

73 Malaysia 143 135 177 327 229 192 363 22.0 1.274 Mexico 99 140 132 83 144 252 156 1.9 0.175 South Africa76 Poland . . . . . . . . . . . . .77 Lebanon 455 187 127 77 83 62 100 37.5

Upper-middle-income 1,2191 741 1 5761 664t 7261 9381 1,1301 3.0w 0.1w

78 Bmzil 235 208 101 161 123 178 288 2.0 0.179 Uruguay 7 4 3 4 5 27 18 5.9 0.280 Hungaly . . . . . . . . . . . . . . .81 Panama 39 41 47 72 69 52 40 17.7 0.782 Argentina 44 30 48 49 39 88 99 3.2 0.1

83 Yugoslavia -15 -8 3 3 11 19 35 1.5 0.184 Algeria 167 136 95 122 173 165 222 9.6 0.385 Korea, Rep. 330 34 8 -37 -9 -18 II 0.3 0.086 Gabon 44 62 64 76 61 79 82 76.8 2.387 Portugal 82 49 43 97 101 139 65 6.4 0.2

88 Venezuela 14 13 10 14 11 16 19 1.0 0.089 Greece 13 12 13 13 II 19 34 3.4 0.190 TrinidadandTobago -2 6 5 5 7 19 34 28.0 0.891 Libya 11 12 6 5 5 11 6 1.6 0.092 Oman 231 133 71 67 78 84 16 11.7 0,2

93 Iran, Islamic Rep. 9 3 48 13 16 27 70 1.594 Iraq 9 6 13 4 26 33 91 5.395 Rumania

Low-and middle-income 24,4091 22,8131 21,7101 22,1151 23,7351 27,6431 30,3391 8.1w 1.3wSub-Saharan Africa 6,8891 7,1021 6,8891 7,1131 8,139 t 9,8981 11,1511 25.5w 8.3 wEast Asia 3,451 t 2,8501 2,9641 3,1141 3,1531 3,9421 4,860 t 3.3w 0.8wSouth Asia 4,761 I 4,847 t 4,612 1 4,579 t 4,645 1 5,873 1 5,5991 5.2 w 1.7 wEurope, M.East, & N.Africa 7,343 t 5,928 t 4,886 t 4,727 t 4,983 t 4,885 t 5,271 1 16.6 w 1.2 wLatin America & Caribbean 1,965 I 2,087 1 2,359 1 2,582 1 2,814 t 3,045 1 3,458 I 8.6 w 0.4 w

17 highly indebted 2,727 t 2,405 1 2,3791 2,3201 2,9641 3,3701 3,4221 5.9w 0.4w

High-income economiesOECD members .. ,. .. .. .. ..

tOther 843 r 954 1 1,421 I 1,353 I 2,060 1 2,055 t 1,434 1 50.3 w 0.7w

96 Spain 2 22 0 0 0 0 0 0.0 0.097 Ireland98 tSaudi Arabia 30 57 44 36 29 31 22 1.8 0.099 tlsrael 773 857 1,345 1,256 1,978 1,937 1,251 285.9 3.6

100 New Zealand

101 tSingapore 22 20 15 41 24 29 23 8.9 0.1102 tHong Kong 9 8 9 14 20 18 19 3.5 0.0103 Italy104 United Kingdom105 Australia

106 Belgium107 Netherlands108 Austria109 France110 Germany, Fed. Rep.

111 Finland112 tKuwait 10 6 5 4 4 5 3 1.8 0.0113 Denmark114 Canada115 Sweden

116 Japan117 tUnited Arab Emirates 1 5 4 3 4 34 115 79.0 0.5118 Norway119 United States120 Switzerland

Total reporting economies 25,254 1 23,789 1 23,131 t 23,469 25,795 t 29,698 1 31,773 t 8.4 w 1.1 wOil exporters 4,768 1 4,282 I 3,8641 3,991 I 3.960 1 4.452 I 5,181 I 9.0 w 0.8w

Nonreporting nonmembers 751 771 881 1071 hOt 149t 165I 4.0w

Table 21. Total external debt

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

204

Long-term debt(millions of dollars)

Use of IMF credit(millions of dollars)

Short-term debt(millions of dollars)

Total external debt(millions of dollars)

Public andpublicly guaranteed

Privatenonguaranteed

1970 1987 1970 1987 1970 1987 1970 1987 1970 1987

Low-income economiesChina and IndiaOther low-income

1 Ethiopia 169 2,434 0 0 0 63 94 2,5902 Bhutan 41 0 0 0 0 0 413 Chad 33 270 0 0 3 10 38 3184 Zaire 311 7,334 0 0 0 833 462 8,6305 Bangladesh 0 8,851 0 0 0 581 74 9,5066 Malawi 122 1,155 0 0 0 110 98 . . 1,3637 Nepal 3 902 0 0 0 27 19 9478 LaoPDR 8 736 0 0 0 0 0 7369 Mozambique . - . - . . . - . - . . - - . -

10 Tanzania 250 4,068 IS 11 0 65 . . 192 - . 4,33511 BurkinaFaso 21 794 0 0 0 0 67 86112 Madagascar 89 3,114 0 0 0 144 119 3,37713 Mali 238 1,847 0 0 9 75 94 2,01614 Burundi 7 718 0 0 8 0 37 75515 Zambia 623 4,354 30 0 0 957 1,089 6,40016 Niger 32 1,259 . . 254 0 91 . . 75 1,67917 Uganda 138 1,116 0 0 0 229 . . 60 1,40518 China . . 23,659 0 0 0 848 . . 5,720 30,22719 Somalia 77 2,288 0 0 0 154 92 2,53420 Togo 40 1,042 0 0 0 78 . . 103 - - 1,223

21 India 7,838 37,325 100 3,442 0 3,653 1,950 . . 46,37022 Rwanda 2 544 0 0 3 0 39 58323 Sierra Leone 59 513 0 0 0 83 63 65924 Benin 41 929 0 0 0 0 - 204 . . 1,13325 Central African Rep. 24 520 0 0 0 37 - . 28 58526 Kenya 319 4,482 88 496 0 381 . . 59! . 5,95027 Sudan 307 7,876 . 372 31 859 2,019 11,12628 Pakistan 3,064 13,150 5 56 45 804 2,280 16,28929 Haiti 40 674 0 0 2 52 . 79 80430 Lesotho 8 237 0 0 0 0 4 . - 24131 Nigeria 452 25,707 115 350 0 0 2,657 28,71432 Ghana 488 2,207 10 30 46 779 108 3,12433 Sri Lanka 317 4,109 . . 117 79 234 273 4,73334 Yemen, PDR 1 1,669 0 0 0 0 55 1,72435 Mauritania 27 1,868 0 0 0 47 119 2,03536 Indonesia 2,443 41,284 461 4,105 139 716 6,476 52,58!37 Liberia 158 1,152 0 0 4 29! 175 1,61838 Afghanistan . - . . . . . . . . -

39 Burma 106 4,257 0 0 17 10 8! . 4,34840 Guinea 312 1,617 0 0 3 30 138 - . 1,7844! Kampuchea,De,n.42 VietNam

Middle-income economiesLower-middle-income

43 Senegal 100 3,068 31 42 0 267 319 3,69544 Bolivia 480 4,599 1! 200 6 14! 608 5,54845 Zimbabwe 229 2,044 . . 5! 0 157 260 2,51246 Philippines 625 22,321 919 1,516 69 1,194 4,931 29,96247 YemenArabRep. 2,155 0 0 0 2 232 . . 2,38948 Morocco 711 18,468 15 372 28 1,07! 795 20,70649 Egypt, Arab Rep. 1,713 34,515 . 1,098 49 182 4,469 40,26450 PapuaNewGuinea 36 1,471 173 1,135 0 0 105 . . 2,71!51 Dominican Rep. 212 2,938 14! 133 7 284 341 3,69552 Chted'Ivoire 255 8,450 ii 3,264 0 576 . . 1,265 13,555

53 Honduras 90 2,68! 19 115 0 68 439 . . 3,30354 Nicaragua 147 6,150 0 0 8 0 1,14! 7,29!55 Thailand 324 14,023 402 3,108 0 916 2,664 20,71056 ElSalvador 88 1,597 88 70 7 6 89 1,76257 Congo, People's Rep. 124 3,679 0 0 0 14 944 4,63658 Jamaica 160 3,511 822 58 0 679 199 4,44659 Guatemala 106 2,345 14 116 0 59 305 2,82560 Camemon 131 2,785 9 520 0 0 722 4,02861 Paraguay 112 2,218 . . 28 0 0 201 2,44762 Ecuador 193 9,026 49 30 14 490 . . 891 10,437

63 Botswana 17 514 0 0 0 0 3 51864 Tunisia 541 6,189 . . 226 13 271 224 - . 6,90965 Turkey 1,844 30,490 42 866 74 770 8,692 40,81866 Colombia 1,297 13,828 283 1,524 55 0 1,654 17,00667 Chile 2,067 15,536 501 2,466 2 1,465 . . 1,772 - . 21,239

High-income economiesOECD members

fOther

Low- and middle-incomeSub-Saharan AfricaEast AsiaSouth AsiaEurope, M.East, & N.AfricaLatin America & Caribbean

17 highly indebted

96 Spain97 Ireland

103 Italy104 United Kingdom105 Australia

106 Belgium107 Netherlands108 Austria109 France110 Germany, Fed. Rep.

111 Finland112 tKuwait133 Denmark114 Canada115 Sweden

116 Japan117 tUnited Arab Emirates118 Norway119 United States120 Switzerland

Total reporting economiesOil exporters

Nonreporting nonmembers

205

Long-term debt(millions ofdollars)

Use of IMF credit(millions ofdollars)

Short-term debt(millions ofdollars)

Total external debt(millions ofdollars)

Public andpublicly guaranteed

Privatenonguaranteed

1970 1987 1970 1987 1970 1987 1970 1987 1970 1987

68 Peni 856 12,485 1,799 1,433 1 845 3,295 18,05869 Mauritius 32 545 0 46 150 34 . 77570 Jonlan 119 3,518 0 0 81 965 4,56471 CostaRica 134 3,629 112 290 132 676 4,72772 Syrian Arab Rep. 233 3,648 0 0 1 0 . . 1,030 4,678

73 Malaysia 390 19,065 50 2,610 074 Mexico 3,196 82,771 2,770 14,148 5,163 5,800 107,88275 South Africa . . .

76 Poland . . 35,569 0 0 6,565 42,13577 Lebanon 64 236 0 0 0 . 260 . . 496

Upper-middle-income

78 Brazil 3,421 91,653 1,706 14,434 3,977 13,868 123,93279 Umguay 269 3,048 29 144 392 651 4,23580 Hungary . . 15,931 0 0 809 . 2,217 18,95781 Panama 194 3,722 0 0 346 1,256 5,32482 Argentina 1,880 47,451 3,291 2,858 3,854 . . 2,651 . . 56,813

83 Yugoslavia 1,199 14,446 854 5,045 1,852 . 2,175 . 23,51884 Algeria 937 19,240 0 0 0 3,641 22,88185 Korea,Rep. 1,816 24,541 175 6,103 525 9,291 40,45986 Gabon 91 1,605 0 0 60 406 . . 2,07187 Portugal 485 14,922 268 630 529 . . 2,164 . . 18,245

88 Venezuela 728 25,245 236 7,504 0 3,770 36,51989 Greece 905 17,437 388 1,429 0 4,255 23,12090 TrinidadandTobago 101 1,635 0 0 0 166 1,80191 Libya . . . . .

92 Oman . . 2,474 0 0 0 405 2,879

93 Iran, Islamic Rep.94 Iraq95 Roenania 5,425 0 507 730 6,662

98 f Saudi Arabia99 ttsrael 2,274 16,767 361 5,729 13 0 3,837 26,332

100 New Zealand

101 tSingapore 152 2,543 248 1,643 0 0 305 4,491102 tHong Kong

Table 22. flow of public and private external capital

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

206

Disbursements(millions ofdollars)

Repayment ofprincipal(millions ofdollars)

Net flows(millions ofdollars)

Public andpublicly

guaranteed

Private

nonguaranteed

Public andpublicly

guaranteedPrivate

nonguara steed

Public andpublicly

guaranteedPrtvate

nonguara steed

1970 1987 1970 1987 1970 1987 1970 1987 1970 1987 1970 1987

Low-income economiesChina and IndiaOther low-income

I Ethiopia 28 403 0 0 15 130 0 0 13 273 0 02 Bhutan 16 0 0 0 0 0 16 0 03Chsd 6 51 0 0 3 3 0 0 3 48 0 04 Zaire 32 493 0 0 28 127 0 0 3 365 0 05 Bangladesh 0 923 0 0 0 191 0 0 0 733 0 06 Malawi 40 132 0 0 3 45 0 0 37 87 0 07 Nepal 1 152 0 0 2 20 0 0 2 133 0 08 LaoPDR 6 118 0 0 I II 0 0 4 107 0 09 Mozambique

10 Tanzania 51 107 8 3 10 46 3 2 40 61 5

11 BurkinaFaso 2 112 0 0 2 17 0 0 0 95 0 012 Madagascar 11 229 0 0 5 64 0 0 5 165 0 013 Mali 23 117 0 0 0 19 0 0 23 99 0 014 Burundi 1 140 0 0 0 27 0 0 1 113 0 015 Zambia 351 130 35 73 316 5816 Niger 12 156 50 2 47 30 11 109 2017 Uganda 27 187 0 0 4 46 0 0 23 141 0 018 China 5,704 0 0 1,774 0 0 3,930 0 019 Somalia 4 71 0 0 1 5 0 0 4 66 0 020 logo 5 50 0 0 2 35 0 0 3 15 0 021 India 883 5,391 25 800 289 2,049 25 631 594 3,342 0 16922 Rwanda 0 91 0 0 0 13 0 0 0 78 0 023 SierraLeone 8 2 0 0 11 4 0 0 3 2 0 024 Benin 2 68 0 0 1 19 0 0 1 49 0 025 CentralAfricanRep. 2 76 0 0 2 13 0 0 1 63 0 026 Kenya 35 449 41 90 17 291 12 53 17 158 30 3727 Sudan 53 169 22 30 30 13928 Pakistan 489 941 3 41 112 792 1 15 378 148 2 2629 Haiti 4 94 0 0 3 14 0 0 1 80 0 030 Lesotho 0 41 0 0 0 9 0 0 0 31 0 031 Nigeria 56 1,021 25 50 38 239 30 100 18 782 5 5032 Ghana 42 365 0 14 117 0 8 28 248 833 SriLanka 66 387 . . 0 29 219 . 9 36 168 . . 934 Yemen, PDR 1 228 0 0 0 56 0 0 1 172 0 035 Mauritania 5 140 0 0 3 58 0 0 1 82 0 036 Indonesia 441 5,276 195 915 59 3,096 61 638 383 2,180 134 27737 Liberia 7 32 0 0 11 5 0 0 4 27 0 038 Afghanistan S . . . . . . . . . . . . .39 Burma 22 336 0 0 13 114 0 0 9 222 0 040 Guinea 90 146 0 0 II 76 0 0 80 71 0 0

41 Kampuchea,Dem.42 VietNam

Middle-income economiesLower-middle-income

43 Senegal 19 360 1 6 5 161 3 8 14 199 2 244 Bolivia 55 209 3 0 17 74 2 0 38 134 1 045 Zimbabwe . . 278 . . . . 5 274 . . . . . 346 Philippines 141 1,017 276 80 74 778 186 98 67 240 90 1847 YemenArabRep. 115 0 0 100 0 0 15 0 0

48 Momcco 168 1,264 8 78 37 652 3 34 131 612 5 4449 Egypt, Arab Rep. 397 1,291 . 245 309 778 . . 150 88 513 . . 9550 PapuaNewGuinea 43 176 111 268 0 99 20 249 43 78 91 1951 DominicanRep. 38 144 22 0 7 68 20 14 31 76 2 1452 Côted'Ivoirc 78 602 4 900 29 289 2 591 49 314 2 30953 Honduras 29 184 10 14 3 142 3 24 26 42 7 1054 Nicaragua 44 495 0 0 16 22 0 0 28 473 0 055 Thailand 51 1,311 169 577 23 1,102 107 789 28 209 62 21256 ElSalvador 8 120 24 0 6 106 16 14 2 14 8 1457 Congo, People's Rep. 20 532 0 0 6 150 0 0 15 382 0 058 Jamaica 15 312 165 4 6 211 164 10 9 101 1 -659 Guatemala 37 125 6 0 20 147 2 3 17 22 4 360 Cameroon 29 302 11 217 5 203 2 210 24 99 9 761 Paraguay 15 214 . . 0 7 128 . . 3 8 86 . . 362 Ecuador 41 652 7 0 16 223 11 20 26 429 4 2063 Botswana 6 102 0 0 0 38 0 0 6 64 0 064 Thnisia 89 806 . . 43 47 591 . . 68 42 215 . . 2465 Turkey 329 4,182 1 435 128 2,741 3 279 201 1,441 2 15666 Colombia 253 1,217 0 79 75 1,264 59 140 177 47 59 6167 Chile 408 582 247 195 166 186 41 108 242 396 206 87

Low- and middle-incomeSub-Saharan AfricaEast AsiaSouth AsiaEurope, M.East, & N.AfricaLatin America & Caribbean

17 highly indebted

High-income economiesOECD members

tOther

96 Spain97 Ireland

102 Hong Kong103 Italy104 United Kingdom105 Australia

106 Belgium107 Netherlands108 Austria109 France110 Gemiany, Fed. Rep.

Ill Finland112 tKuwail113 Denmark114 Canada115 Sweden

116 Japan117 tUnited Arab Emirates118 Norway119 United States120 Switzerland

Total reporting economiesOil exporters

Nonreporting nonmembers

a. Disbursements less repayments of principal may not equal net flow because of rounding.

207

Disbursements(millions of dollars)

Repayment ofprincipal(millions of dollars)

Net flows(millions of dollars)

Public andpublicly

guaranteedPrivate

nonguaranteed

Public andpublicly

guaranteedPrivate

nonguaranteed

Public andpublicly

guaranteedPrivate

nonguaranteed

1970 1987 1970 1987 1970 1987 1970 1987 1970 1987 1970 1987

68 Peni 148 491 240 106 100 251 233 10 48 241 7 9669 Mauritius 2 70 0 22 1 45 0 3 1 25 0 1970 Jordan 14 349 0 0 3 334 0 0 12 15 0 071 CostaRica 30 86 30 0 21 61 20 16 9 25 10 1672 SyrianArabRep. 60 540 0 0 31 253 0 0 29 287 0 0

73 Malaysia 45 1,374 12 585 47 1,757 9 940 2 383 3 35574 Mexico 772 8,303 603 247 475 3,249 542 1,084 297 5,054 61 83775 South Africa . . . 0 . . . . .

76 Poland . 493 . 0 . 962 . . 0 . 469 . . 077 Lebanon 12 13 0 0 2 17 0 0 10 4 0 0

Upper-middle-income

78 Brazil 892 1,555 900 0 256 2,942 200 740 637 1,388 700 74079 Uniguay 37 237 13 125 47 134 4 19 10 102 9 10780 Hungaly . 3,168 0 0 . . 2,097 0 0 . . 1,070 0 081 Panama 67 139 0 0 24 158 0 0 44 19 0 082 Argentina 482 2,916 424 200 344 507 428 188 139 2,409 4 12

83 Yugoslavia 179 313 465 233 170 996 204 388 9 683 261 15584 Algeria 308 4,196 0 0 34 3,543 0 0 274 653 0 085 Korea, Rep. 444 2,218 32 2,173 198 10,455 7 2,639 246 8,237 25 46686 Gabon 26 265 0 0 9 13 0 0 17 252 0 087 Portugal 18 2,773 20 110 63 3,643 22 101 45 871 9

88 Venezuela 226 315 67 0 42 1,209 25 380 184 894 41 38089 Greece 163 2,676 144 100 62 2,294 37 285 101 383 107 18590 TrinidadandTobago 8 129 0 0 10 263 0 0 3 134 0 091 Libya . . . . . . . . . . . . . . . . .

92 Oman 342 0 0 436 0 0 . . 94 0 0

93 Iran, Islamic Rep. . . . . . . . . .

94 Iraq .. .. .. .. .. .. ..95 Ronsania 479 0 0 1,128 0 0 649 0 0

98 lSaudi Arabia99 ttsrael 410 1,052 123 794 26 1,080 36 548 385 28 87 246

100 New Zealand

101 tSingapore 61 443 53 320 6 307 49 265 55 136 5 55

Table 23. Total external public and private debt and debt service ratios

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

208

Total long-term debtdisbursed and outstanding

Total interestpayments

on long-term debt(millions of dollars)

Total long-term debtservice as a percentage of.

Millions of dollarsAs a percentage

of GNP GNPExports of goods

and services

1970 1987 /970 1987 1970 1987 1970 1987 1970 /987

Low-income economiesChina and IndiaOther low-income

I Ethiopia 169 2,434 9.5 45,6 6 50 1.2 3.4 11.4 28.42 Bhutan . 41 . . 19.9 . . 1 . . 0.2 .

3 Chad 33 270 9.9 28.1 0 3 0.9 0.7 4.2 3.94 Zaire 311 7,334 9.! 139.5 9 119 11 4.7 4.4 12.85 Bangladesh 0 8,851 0.0 50.6 0 132 0.0 1.8 0.0 24.26 Malawi 122 1,155 43.2 98.3 4 26 2.3 6.0 7.8 23.37 Nepal 3 902 0.3 32.5 0 14 0.3 1.2 3.2 9.78 LaoPDR 8 736 105.1 0 2 1.99 Mozambique . . . . . . . . . . . . . . . .

10 Tanzania 265 4,079 20.7 144.1 8 38 1.6 3.0 6.3 19.211 BurkinaFaso 21 794 6.6 44.0 0 14 0.7 1.7 6.812 Madagascar 89 3,114 10.4 163.2 2 83 0.8 7.7 3.7 35.313 Mali 238 1,847 71.4 95.7 0 13 0.2 1.7 1.4 9.914 Burundi 7 718 3.1 60.3 0 IS 0.3 3.6 2.3 38.515 Zambia 653 4,354 37.5 227.5 . . . . . . .

16 Niger . . 1.513 . . 72.6 . . 73 . . 7.2 . . 46.917 Uganda 138 1,116 7.3 29.7 5 24 0.5 1.9 2.9 19.518 China . . 23,659 . . 8.1 . . 1,069 . . 1.0 . . 7.!19 Somalia 77 2,288 24.4 236.9 0 4 0.3 0.9 2.! 8.320 Togo 40 1,042 16.0 90.6 I 29 1.0 5.5 3.1 14.221 India 7,938 40,767 14.9 16.5 193 1,517 0.9 1.7 23.6 24.022 Rwanda 2 544 0.9 26.1 0 7 0.1 1.0 1.2 11.323 SierraLeone 59 513 14.3 54.6 3 I 3.1 0.5 10.824 Benin 41 929 15.1 56.5 0 IS 0.6 2.0 2.4 15.925 CentralAfricanRep. 24 520 13.5 49.2 1 9 1.7 2.! 5.1 12.!26 Kenya 406 4,978 26.3 64.3 17 244 3.0 7.6 9.1 33.827 Sudan . . 8,248 , . 101.9 . . . . . . .

28 Pakistan 3,069 13,205 30.6 38.2 77 386 1.9 3.5 23.6 26.329 Haiti 40 674 10.2 30.2 0 9 1.0 1.0 59.4 7.030 Lesotho 8 237 7.7 37.1 0 5 0.5 2.3 4.5 4.43! Nigeria 567 26,057 4.3 111.3 28 569 0.7 3.9 7.! 11.732 Ghana 498 2,237 22.9 45.3 12 58 1.2 3.7 5.5 20.333 Sri Lanka . . 4,226 64.7 . . 126 5.4 . . 20.234 Yemen,PDR I 1,669 . . 177.5 0 15 . . 7.6 0.0 38.235 Mauritania 27 1,868 13.9 215.! 0 28 1.8 9.9 3.4 18.236 Indonesia 2,904 45,389 29.9 68.8 46 2,748 1.7 9.8 13.9 33.237 Liberia 158 1,152 39.2 108.4 6 6 4.3 1.0 8.! 2.538 Afghanistan . . . . . . . . . . .39 Burma 106 4,257 3 69 12.1 59.340 Guinea 312 1,617 . . . . 4 35

4! Kampuchea,Dem.42 VietNam

Middle-income economiesLower-middle-income

43 Senegal 13! 3,109 15.5 69.2 2 116 1.1 6.4 4.0 22.344 Bolivia 491 4,799 49.3 115.6 7 62 2.6 3.3 12.6 22.145 Zimbabwe . . 2,095 . . 37.1 . . . . . . . . .

46 Philippines 1,544 23.837 21.8 69.4 44 1,497 4.3 6.9 23.0 25.747 YemenArabRep. . . 2,155 . . 46.6 45 . . 3.1 . . 24.848 Morocco 726 18,840 18.6 117.9 25 624 1.7 8.2 9.2 30.849 Egypt,ArabRep. . . 35,613 . . 108.7 . . 806 . . 5.3 . . 21.550 PapuaNewGuinea 209 2,606 33.4 91.1 10 157 4.8 17.7 24.6 37.451 DominicanRep. 353 3,071 26.1 66.3 13 106 2.9 4.1 15.252 Côte d'Ivoire 266 11,714 19.5 124.1 12 597 3.1 15.6 7.5 40.853 Honduras 109 2,796 15.6 73.6 4 92 1.4 6.8 5.0 26.154 Nicaragua 147 6,150 19.5 207.8 7 12 3.0 1.2 10.555 Thailand 726 17,13! 10.2 36.2 33 1,057 2.3 6.2 14.0 20.656 ElSalvador 176 1,667 17.3 36.0 9 76 3.1 4.2 12.0 21.057 Congo, People's Rep. 124 3,679 46.5 195.0 3 45 3.4 10.3 11.5 18.6

58 Jamaica 982 3,569 73.1 141.2 64 231 17.4 17.9 43.5 27.559 Guatemala 120 2,461 6.5 35.8 7 153 1.6 4.4 8.2 25.860 Cameroon 140 3,306 12.6 27.1 5 177 1.0 4.8 4.0 27.961 Paraguay . . 2,246 . . 49.5 . . 96 . . 5.0 . . 21.762 Ecuador 242 9,056 14.8 93.2 10 279 2.2 5.4 14.0 21.963 Botswana 17 514 21.2 38.2 0 32 0.7 5.2 1.0 3.764 Tunisia . . 6,415 . . 69.7 . . 340 . . 10.8 . . 29.465 Turkey 1,886 31,356 15.0 47.9 44 1,885 1.4 7.5 22.6 34.066 Colombia 1,580 15.352 22.5 45.3 59 1,177 2.8 7.6 19.0 36.367 Chile 2,568 18,002 32.1 103.6 104 1,420 3.9 9.9 24.5 26.4

High-income economiesOECD members

(Other

96 Spain97 Ireland

103 Italy104 United Kingdom105 Australia

106 Belgium107 Netherlands108 Austria109 France110 Germany, Fed. Rep.

Ill Finland112 'fKuwait113 Denmark114 Canada115 Sweden

116 Japan117 '('United Arab Emirates118 Norway119 United Slates120 Switzerland

Total reporting economiesOil exporters

Nonreporting nonmembers

Note: Public and private debt includes public, publicly guaranteed, and private nonguaranteed debt; data are shown only when they are available for all categories.

209

Total long-term debtdisbursed and outstanding

Total interestpayments

on long-term debt(millions of dollars)

Total long-term debtservice usa percentage of:

Millions of dollarsAs a percentage

of GNP GNPExports of goods

and services

1970 1987 1970 1987 1970 1987 1970 1987 1970 1987

68 Peni 2,655 13,918 37.3 31.2 162 203 7.0 1.0 40.0 12.969 Mauritius 32 59! 14.3 34.1 2 31 1,4 4.6 3.2 6.570, Jordan 119 3,518 22.9 75.4 2 183 0.9 11.1 3.6 21.871 Costa Rica 246 3,919 25.3 95.9 14 139 5.7 5.3 19.9 14.372 SyrianArabRep. 233 3.648 10.8 15.3 6 112 1.7 1.5 11.3 16.5

73 Malaysia 440 21,675 10.8 74.3 25 1,461 2.0 14.3 4.5 20.074 Mexico 5,966 96,919 16.2 69.6 283 7,091 3.5 8.2 44.3 38.475 South Africa . . . . . . .

76 Poland . . 35,569 . . 55.7 . . 960 . . 3.0 14.777 Lebanon 64 236 4.2 1 13 0.2

Upper-middle-income

78 Brazil 5,128 106,087 12.2 33.7 224 5,834 1.6 3.0 21.8 33.279 Uruguay 298 3,192 12.5 44.2 17 273 2.9 5.9 23.6 25.780 Hungaiy . . 15,931 . . 63.5 . . 1,130 . . 12.9 . . 26.781 Panama 194 3,722 19.5 72.6 7 226 3.1 7.5 7.7 6.582 Argentina 5,17! 50,309 23.8 65.5 338 3,775 5.1 5.8 51.7 52.0

83 Yugoslavia 2,053 19,491 15.0 32.2 104 1,717 3.5 5.! 19.7 19.484 Algeria 937 19,240 19.3 30.5 10 1,377 0.9 7.8 3.9 49.085 Korea,Rep. 1,991 30,644 22.3 25.8 76 2,375 3.1 13.0 20.4 27.586 Gabon 9! 1,605 28.8 52.5 3 57 3.8 2.3 5.7 5.!87 Portugal 753 15,552 12.1 44.6 34 1,232 1.9 14.3 8.7 38.9

88 Venezuela 964 32,749 7.6 67.8 53 2,518 0.9 8.5 4.3 32.489 Greece 1,293 18,866 12.7 40.4 63 1,260 1.6 8.2 14.7 37.890 TrinidadandTobago 101 1,635 13.3 39.3 6 121 2.1 9.2 4.691 Libya . . . . . . . . .92 Oman 2,474 33.9 177 8.4

93 Iran, Islamic Rep. ' '

94 Iraq . .

95 Romania . . 5,425 . . . . 503

98 ('Saudi Arabia99 '('Israel 2,635 22,495 47.9 67.2 34 1,864 1.7 10.4 6.8 25.3

100 New Zealand

101 tSingapore 400 4,186 20.9 20.4 23 305 4.0 4.3 3.9 2.4102 tHong Kong

Low- and middle-incomeSub-Saharan AfricaEast AsiaSouth AsiaEurope, M.East, & N.AfricaLatin America & Caribbean

17 highly indebted

Table 24. External public debt and debt service ratios

Note: For data comparability and coverage, see the technical notes. Figures in italics arc for years other than those specified.

210

External public debt outstanding and disbursedInterest payments on

external public debt(millions ofdollars)

Debt service as a percentage of

Millions ofdollars

As a percentageof GNP GNP

Exports ofgoods and services

1970 1987 1970 1987 1970 1987 1970 /987 1970 1987

Low-income economies . 218,245 28.4 w 16,834 2.2 w 15.7 wChina and India . 60,983 11.3w 6,139 1.1 w 10.7 wOther low-income 10,422 t 157,261 15.5w 68.8 w 720 t 10,696 1 1.1 w 4.7 w 7.1w 21.9 w

1 Ethiopia 169 2,434 9.5 45.6 6 50 1.2 3.4 11.4 28.42 Bhutan . . 41 . . 19.9 . . I . . 0.23 Chad 33 270 9.9 28.1 0 3 0.9 0.7 4.2 3.94 Zaire 311 7,334 9.1 139.5 9 119 I.! 4.7 4.4 12.85 Bangladesh 0 8,851 0.0 50.6 0 132 0.0 1.8 0.0 24.26 Malawi 122 1,155 43.2 98.3 4 26 2.3 6.0 7.8 23.37 Nepal 3 902 0.3 32.5 0 14 0.3 1.2 3.2 9.78 La0PDR 8 736 105.1 0 2 1.99 Mozambique . . . . . . . . . . . . . . . . .

10 Tanzania 250 4,068 19.5 143.7 7 37 1.3 2.9 5.3 18.5

II BurkinaFaso 21 794 6.6 44.0 0 14 0.7 1.7 6.812 Madagascar 89 3,114 10.4 163.2 2 83 0.8 7.7 3.7 35.313 Mali 238 1,847 71.4 95.7 0 13 0.2 1.7 1.4 9.914 Burundi 7 718 3.1 60.3 0 15 0.3 3.6 2.3 38.515 Zambia 623 4,354 35.7 227.5 29 56 3.7 6.7 6.4 13.5

16 Niger 32 1,259 5.0 60.4 1 60 0.4 5.1 4.0 33.517 Uganda 138 1,116 7.3 29..7 5 24 0.5 1.9 2.9 19.518 China . . 23,659 . . 8.1 . . 1,069 . . 1.0 . . 7.119 Somalia 77 2,288 24.4 236.9 0 4 0.3 0.9 2.1 8.320 Togo 40 1,042 16.0 90.6 1 29 1.0 5.5 3.1 14.2

21 India 7,838 37,325 14.7 15.1 187 1,247 0.9 1.3 22.2 18.922 Rwanda 2 544 0.9 26.1 0 7 0.1 1.0 1.2 11.323 SierraLeone 59 513 14.3 54.6 3 1 3.1 0.5 10.824 Benin 41 929 15.1 56.5 0 15 0.6 2.0 2.4 15.925 CentralAfricanRep. 24 520 13.5 49.2 1 9 1.7 2.1 5.1 12.1

26 Kenya 319 4,482 20.6 57.9 13 211 1.9 6.5 6.0 28.827 Sudan 307 7,876 15.2 97.3 13 18 1.7 0.6 10.7 6.828 Pakistan 3,064 13,150 30.6 38.0 77 381 1.9 3.4 23.5 25.929 Haiti 40 674 10.2 30.2 0 9 1.0 1.0 59.4 7.030 Lesotho 8 237 7.7 37.1 0 5 0.5 2.3 4.5 4.431 Nigeria 452 25,707 3.4 109.8 20 540 0.4 3.3 4.3 10.032 Ghana 488 2,207 22.5 44.7 12 56 1.2 3.5 5.5 19.233 SriLanka 317 4,109 16.1 62.9 12 120 2.1 5.2 10.9 19.234 Yemen, PDR I 1,669 . . 177.5 0 15 . . 7.6 0.0 38.235 Mauritania 27 1,868 13.9 215.1 0 28 1.8 9.9 3.4 18.2

36 Indonesia 2,443 41,284 25.2 62.6 25 2,338 0.9 8.2 7.0 27.837 Liberia 158 1,152 39.2 108.4 6 6 4.3 1.0 8.1 2.538 Afghanisean . . . . . . . . .

39 Burma 106 4,257 . . 3 69 . . 12.1 59.340 Guinea 312 1,617 . , 4 35 ,

41 Kampuchea,Dem.42 VietNam

Middle-income economies 28,807 t 668,122 t 11.5w 44.8w 4,193 t 85.269 t 1.7w 5.7w 11.7w 23.9wLower-middle-income 16,847 t 378,385t 13.5 w 57.5 w 2,392 t 36,189 t 1.9w 5.5 w 12.6w 21.7 w

43 Senegal 100 3,068 11.9 68.3 2 113 0.8 6.1 2.9 21.444 Bolivia 480 4,599 48.2 110.8 7 62 2.3 3.3 11.3 22.145 Zimbabwe 229 2,044 15.5 36.2 5 109 0.6 6.8 2.3 23.246 Philippines 625 22,321 8.8 65.0 26 1,365 1.4 6.2 7.5 23.247 YemenArabRep. 2,155 46.6 45 3.1 24.8

48 Morocco 711 18,468 18.2 115.6 24 618 1.6 7.9 8.7 29.949 Egypt, Arab Rep. 1,713 34,515 22.5 105.4 56 716 4.8 4.6 38.0 18.550 Pspua New Guinea 36 1,471 5.8 51.4 1 77 0.2 6.1 1.1 13.051 Dominican Rep. 212 2,938 15.7 63.4 4 94 0.8 3.5 4.452 Cole cl'Ivoire 255 8,450 18.7 89.5 12 422 2.9 7.5 7.1 19.6

53 Honduras 90 2,681 12.9 70.6 3 86 0.8 6.0 2.9 23.054 Nicaragua 147 6,150 19.5 207.8 7 12 3.0 1.2 10.555 Thailand 324 14,023 4.6 29.6 16 845 0.6 4.1 3.3 13.656 El Salvador 88 1,597 8.6 34.5 4 74 0.9 3.9 3.6 19.457 Congo,People'sRep. 124 3.679 46.5 195.0 3 45 3.4 10.3 11.5 18.6

58 Jamaica 160 3,511 11.9 138.9 9 226 1.1 17.3 2.8 26.659 Guatemala 106 2,345 5.7 34.1 6 145 1.4 4.2 7.4 24.960 Cameroon 131 2,785 11.8 22.9 4 133 0.8 2.8 3.2 15.961 Paraguay 112 2,218 19.2 48.8 4 94 1.8 4.9 11.7 21.362 Ecuador 193 9,026 11.8 92.9 7 271 1.4 5.1 8.6 20.7

63 Botswana 17 514 21.2 38.2 0 32 0.7 5.2 1.0 3.764 Thnisia 541 6,189 38.6 67.2 18 322 4.7 9.9 19.7 26.965 Turkey 1,844 30,490 14.7 46.6 42 1,835 1.4 7.0 21.9 31.766 Colombia 1,297 13,828 18.5 40.8 44 1,108 1.7 7.0 11.7 33.467 Chile 2,067 15,536 25.8 89.4 78 1,181 3.1 7.9 19.2 21.1

104 Italy105 United Kingdom106 Australia

107 Belgium108 Netherlands109 Austria110 France111 Germany, Fed. Rep.

112 Finland113 '(Kuwait114 Denmark115 Canada116 Sweden

117 Japan118 '(United Arab Emirates119 Norway120 United States121 Switzerland

Nonreporting nonmembers

Total reporting economiesOil exporters

211

External public debt outstanding and disbursedInterest payments onexternal public debt(millions ofdollars)

Debt service as a percentage of.

Millions ofdollars

As a percentage

ofGNP GNPExports of

goods and services

1970 1987 1970 1987 1970 1987 1970 /987 1970 1987

68 Peru 856 12,485 12.0 28.0 43 198 2.0 1.0 11.6 12.569 Mauritius 32 545 14.3 31.4 2 30 1.4 4.3 3.2 6.170 Jordan 119 3,518 22.9 75.4 2 183 0.9 11.1 3.6 21.871 CostaRica 134 3,629 13.8 88.8 7 121 2.9 4.5 10.0 12.172 SyrianArabRep. 233 3,648 10.8 15.3 6 112 1.7 1.5 11.3 16.5

73 Malaysia 390 19,065 9.5 65.4 22 1,217 1.7 10.2 3.8 14.374 Mexico 3,196 82,771 8.7 59.5 216 5,722 1.9 6.4 23.6 30.175 South Africa . . .. . .76 Poland . . 35,569 . . 55.7 . . 960 . . 3.0 14.777 Lebanon 64 236 4.2 . . 1 13 0.2

Upper-middle-income 12,1181 290,8901 9.6w 34.7 w 1,8191 49,091 t 1.4 w 5.8w 10.6w 25.8w

78 Brazil 3,421 91,653 8.2 29.1 135 4,714 0.9 2.4 12.5 26.779 Uruguay 269 3,048 11.3 42.2 16 270 2.7 5.6 21.7 24.480 Hungary . . 15,931 . . 63.5 . . 1,130 . . 12.9 . . 26.781 Panama 194 3,722 19.5 72.6 7 226 3.1 7.5 7.7 6.582 Argentina 1,880 47,451 8.6 61.7 121 3,387 2.1 5.1 21.6 45.3

83 Yugoslavia 1,199 14,446 8.8 23.9 73 1,122 1.8 3.5 10.0 13.384 Algeria 937 19,240 19.3 30.5 10 1,377 0.9 7.8 3.9 49.085 Korea, Rep. 1,816 24,541 20.3 20.7 71 1,844 3.0 10,4 19.5 21.986 Gabon 91 1,605 28.8 52.5 3 57 3.8 2.3 5.7 5187 Portugal 485 14,922 7.8 42.8 29 1,189 1.5 13.9 6.8 37.i88 Venezuela 728 25,245 5.7 52.3 40 1,660 0.6 5.9 2.9 22.589 Greece 905 17,437 8.9 37.3 41 1,142 1.0 7.4 9.4 33 990 TrinidadandTobago 101 1,635 13.3 39.3 6 121 2.1 9.2 4.691 Libya . . . . . . .

92 Oman 2,474 . . 33.9 177 . . 8.4 .

93 Iran, Islamic Rep.94 Iraq95 Romania 5,425 503

Low- and middle-income 47,066 t 886,367 12.7w 39.2w 5,389 102,104£ 1.5 w 4.5 w 11.2w 22.0 wSub-Saharan Africa 5,374 t 103,874 13.1 w 80.8 w 472 t 5,235 1 1.2w 4.1 w 5.3 w 14.7 wEast Asia 5,654 I 147,605 15.0w 24.9 w 566 1 27,904 t 1.5w 4.7 w 7.9 w 17.2 wSouth Asia 11,3271 68,696t 15.1 w 21.6 w 724 r 5,355 1.0w 1.7w 17.9 w 20.8 wEurope, M. East, & N. Africa 8,832 t 227,861 1 13.5 w 47.9 w 1,197 32,355 1.8w 6.6 w 12.3 w 26.7 wLatin America & Caribbean 15,878 1 338,331 1 10.5 w 45.5w 2,430 31,256 t 1.6w 4.2 w 13.1 w 26.5 w

17 highly indebted 17,923 t 402,171 I 9.8w 47.5 w 2,7891 36,251 I 1.5 w 4.3 w 12.4w 24.9w

High-income economies .OECD members .. .. .. .. .. .. ..

tOther 2,470 1 19,4841 31.3 w 34.5 w 59 t 3,0041 0.7 w 5.3 w 1.5 w 5.8 w

97 Spain98 Ireland99 tSaudi Arabia

100 '(Israel 2,274 16,767 41.3 50.1 13 1,372 0.7 7.3 2.8 17.8101 New Zealand

102 '(Singapore 152 2,543 7.9 12.4 7 196 0.7 2.4 0.6 1.4103 '(Hong Kong

Table 25. Terms of external public borrowing

212

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Low-income economiesChina and India

Commitments(millions of dollars)

Average interestrate

(percent)

Averagematurity(years)

Averagegrace period

(years)

Public loans withvariable interest rates,

as a percentageofpublic debt

1970 1987 1970 1987 1970 1987 1970 1987 1970 1987

. .

31,171 t17,141 t

. .

. .

5.1 w6.2 w . .

23 w19 w .

7 w5 w . .

17.8 w19.0 w

Other low-income 3,360 t 14,030 t 3.2 w 3.7w 29 w 29 w 9 w 8 w 0.2 w 17.4 w

1 Ethiopia 21 561 4.4 4.4 32 24 7 6 0.0 5.82 Bhutan . 13 . . 1.0 . . 40 . . 10 . . 0.03 Chad 10 116 5.7 1.3 8 34 1 8 0.0 0.14 Zaire 258 431 6.5 1.1 13 38 4 9 0.0 5.35 Bangladesh 0 1,009 0.0 1.1 0 42 0 10 0.0 0.0

6 Malawi 14 117 3.8 0.9 29 47 6 10 0.0 2.77 Nepal 17 163 2.8 0.9 27 45 6 10 0.0 0.88 La0PDR 12 114 3.0 0.5 28 42 4 26 0.0 0.09 Mozambique . . . . . . . . . . . . . . . . .

10 Tanzania 284 201 1.2 1.2 39 32 11 10 1.6 2.5

II Burkina Faso 9 74 2.3 2.9 36 24 8 8 0.0 0.412 Madagascar 23 293 2.3 1.5 39 42 9 9 0.0 7.813 Mali 34 63 1.1 2.4 25 33 9 7 0.0 0.314 Burundi 1 30 2.9 2.2 5 35 2 9 0.0 0.015 Zambia 557 267 4.2 3.0 27 28 9 9 0.0 14.7

16 Niger 19 131 1.2 1.1 40 40 8 9 0.0 11.017 Uganda 12 248 3.8 2.5 28 29 7 7 0.0 0.018 China . . 9,210 . . 6.6 . . 15 . . 4 . . 28.219 Somalia 2 154 0.0 1.1 4 41 4 10 0.0 0.920 Togo 3 48 4.6 1.5 17 40 4 10 0.0 4.2

21 India 954 7,931 2.5 5.7 34 23 8 7 0.0 13.122 Rwanda 9 107 0.8 1.6 50 39 11 9 0.0 0.023 Sierra Leone 25 0 2.9 0.0 27 0 6 0 10.6 0.624 Benin 7 76 1.8 1.0 32 45 7 10 0.0 3.725 Central African Rep. 7 21 2.0 1.2 36 38 8 10 0.0 0.0

26 Kenya 50 286 2.6 1.4 37 37 8 10 0.1 4.027 Sudan 95 249 1.8 1.7 17 31 9 8 0.0 1.128 Pakistan 951 1,620 2.8 3.7 32 28 12 8 0.0 5.529 Haiti 5 182 4.8 1.4 10 37 1 9 0.0 1.330 Lesotho 0 42 5.0 3.1 25 29 2 7 0.0 1.2

31 Nigeria 65 78 6.0 7.2 14 18 4 5 2.7 49.532 Ghana 51 630 2.0 1.9 37 29 10 8 0.0 5.733 Sri Lanka 81 340 3.0 3.0 27 32 5 9 0.0 6.134 Yemen, PDR 63 209 0.0 2.7 21 25 11 8 0.0 0.035 Mauritania 7 124 6.0 1.0 11 45 3 10 0.0 6.7

36 Indonesia 520 5,262 2.6 6.1 35 20 9 7 0.0 26.237 Liberia 12 10 6.6 2.8 19 40 5 10 0.0 10.738 Afghanistan . . . . . . . . . . . . . . . . .

39 Burma 48 383 4.1 1.8 16 36 5 10 0.0 0.840 Guinea 68 164 2.9 2.4 13 40 5 9 0.0 10.6

41 Kampuchea,Dem.42 VietNam

Middle-income economies 8,139 t 53,599 t 6.2w 7.2w 16w 13 w 4w 5 w 2.8 w 53.1 wLower-middle-income 4,2841 32,238 t 5.8 w 6.9w 18 w 15 w 5 w 5 w 1.5 w 46.2 w

43 Senegal 7 443 3.8 3.3 23 32 7 8 0.0 4.144 Bolivia 24 301 1.9 6.7 48 26 4 6 0.0 29.145 Zimbabwe . . 410 . . 7.6 . . 12 . . 4 0.0 26.646 Philippines 171 1,182 7.3 5.4 12 22 2 6 0.8 48.247 Yemen Arab Rep. 74 . . 2.2 29 8 3.2

48 Morocco 187 1,425 4.6 7.8 20 19 3 5 0.0 31.149 Egypt, Arab Rep. 704 589 5.3 5.6 21 31 8 7 0.0 2.050 Papua New Guinea 91 258 6.4 4.0 22 21 8 6 0.0 31.951 Dominican Rep. 20 172 2.4 7.3 28 19 5 4 0.0 25.852 Côted'Ivoire 71 490 5.8 6.6 19 18 5 6 9.1 51.4

53 Honduras 23 265 4.1 5.5 30 23 7 6 0.0 18.254 Nicaragua 23 350 7.1 4.1 18 17 4 4 0.0 22.155 Thailand 106 846 6.8 5.3 19 20 4 7 0.0 31.956 ElSalvador 12 221 4.7 5.1 23 26 6 7 0.0 5.757 Congo, People's Rep. 31 258 2.8 7.8 17 15 6 4 0.0 40.4

58 Jamaica 24 369 6.0 6.8 16 15 3 3 0.0 25.359 Guatemala 50 189 3.7 4.7 26 27 6 7 10.3 30.960 Cameroon 42 412 4.7 6.5 29 18 8 5 0.0 5.961 Paraguay 14 150 5.7 5.9 25 21 6 5 0.0 13.762 Ecuador 78 1,045 6.2 7.3 20 17 4 4 0.0 68.9

63 Botswana 38 34 0.6 5.2 39 38 10 8 0.0 12.864 Tunisia 144 667 3.5 7.3 27 15 6 5 0.0 16.865 Turkey 484 6,287 3.6 6.7 19 11 5 4 0.9 31.866 Colombia 363 700 6.0 8.4 21 11 5 3 0.0 40.967 Chile 361 1,011 6.8 7.9 12 14 4 4 0.0 79.1

102 Hong Kong103 ttaly104 United Kingdom105 Australia

106 Belgium107 Netherlands108 Austria109 France110 Germany, Fed. Rep.

Ill Finland112 tKuwait113 Denmark114 Canada115 Sweden

116 Japan117 tUnited Arab Emirates118 Norway119 United States120 Switzerland

Total reporting economiesOil exporters

Nonreporting nonmembers

a. Includes debt inconvertible currencies only.

213

Commitments(millions of dollars)

Average interestrate

(percent)

Averagematurity(years)

Averagegrace period

(years)

Public loans withvariable interest rates,

as a percentageofpublic debt

1970 /987 1970 1987 /970 1987 1970 1987 /970 1987

68 Peru 125 317 7.4 6.6 14 16 4 4 0.0 33.369 Mauritius 14 97 0.0 8.2 24 18 2 3 6.0 14.170 Jordan 35 568 3.8 7.0 15 11 5 3 0.0 22.971 CostaRica 58 102 5.6 6.7 28 20 6 5 7.5 53.872 SyrianArabRep. 14 257 4.4 6.9 9 20 2 3 0.0 0.8

73 Malaysia 84 957 6.1 6.0 19 13 5 4 0.0 49.774 Mexico 858 11,069 7.9 7.7 12 14 3 5 5.7 79.175 South Africa . . . . . . .

76 Poland . . 558 . . 6.5 . . 6 . . 3 . . 64.577 Lebanon 7 37 2.9 7.6 21 26 1 3 0.0 11.9

Upper-middle-income 3,8671 21,371 1 6.7w 7.6w 14w lOw 4w 4w 4.5w 61.8w

78 Brazil 1,439 2,107 6.8 8.3 14 14 3 4 11.8 67.579 Uruguay 71 354 7.9 8.4 12 14 3 4 0.7 68.180 Hungalya . 2,744 . . 7.2 . . 9 . . 6 . . 63.381 Panama 111 189 6.1 7.2 15 15 4 4 0.0 59.182 Argentina 494 3,322 7.3 8.2 12 12 3 5 0.0 84.1

83 Yugoslavia 199 214 7.1 8.4 17 14 6 3 3.3 52.984 Algeria 306 4,535 6.4 7.4 10 6 2 2 2.8 33.085 Korea, Rep. 691 1,295 5.8 7.0 19 17 6 4 1.2 30.586 Gabon 33 90 5.1 6.7 11 13 2 4 0.0 20.687 Portugal 59 2,188 4.3 7.3 17 10 4 5 0.0 42.8

88 Venezuela 198 260 7.8 8.3 8 17 2 3 2.6 89.189 Greece 246 2,881 7.2 7.1 9 8 4 5 3.5 56.190 TrinidadandTobago 3 106 7.5 6.8 10 7 I 4 0.0 34.491 Libya . . . . . . . . . .

92 Oman 389 . . 8.1 10 . . 4 34.8

93 Iran, Islamic Rep. . . .

94 Iraq . . . . . . . .

95 Romania 375 8.1 . . 16 5 . . 27.0

Low- and middle-income 12,453 1 84,770 I 5.1 w 6.4 w 21 w 17 w 6w 5w 1.7w 44.4 wSub-Saharan Africa 1,8791 7,006 I 3.7w 3.4w 26 w 29 w 8w 7w 0.9 w 21.7 wEast Asia 1,677 19,155 1 5.0w 6.3 w 23 w 17 w 6w 5w 0.5 w 34.0wSouth Asia 2,052 t 11,4671 2.7 w 4.7w 32 w 27 w 10 w 7w 0.0 w 8.6 wEurope, M.East, & N.Africa 2,461 24,232 1 5.1 w 7.1 w 18w 11w Sw 4w 1.3 w 36.8 wLatin America & Caribbean 4,383 1 22,9101 6.9w 7.6 w 14w 15 w 4w Sw 4.0 w 68.3 w

17 highly indebted 4,7841 24,346 1 6.9 w 7.7 w 14 w 15 w 4w Sw 3.9w 66.0w

High-income economiesOECD members

tOther 507 1 1,201 I 9.6w 7.0w 14w 9w Sw 4w 0.2w 8.1w

96 Spain97 Ireland98 (Saudi Arabia99 tlsrael 438 853 10.0 7,7 13 10 5 3 0.0 6.1

100 New Zealand

101 tSingapore 69 328 6.9 5.2 18 7 4 5 0.0 16.2

Table 26. Population growth and projections

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those upecified.

214

Average annual growth ofpopulation(percent) Population (millions)

Hypotheticalsize of

stationarypopulation

Assumedyear of

reaching netreproduction

Populationmomentum

1965-80 1980-87 1987-2000 1987 2000 2025a (millions) rate of 1 1990

Low-income economies 2.3w 2.0w 1.9w 2,824t 3,625t 5,161tChina and India 2.2 w 1.6 w 1.5 w 1,866 t 2.279 t 2,893Other low-income 2.6w 2.8 w 2.6w 958 t 1,346 2,268

1 Ethiopia 2.7 2.4 3.1 44 66 122 220 2040 1.92 Bhutan 1.6 2.0 2.4 1 2 3 5 2035 1.73 Chad 2.0 2.3 2.6 5 7 13 26 2045 1.84 Zaire 2.8 3.1 3.1 33 49 97 200 2045 1.95 Bangladesh 2.8 2.8 2.4 106 144 217 324 2025 1.9

6 Malawi 2.9 3.8 3.5 8 12 29 96 2060 1.97 Nepal 2.4 2.7 2.5 18 24 37 57 2030 1.88 La0PDR 1.9 2.4 2.6 4 5 8 14 2030 1.89 Mozambique 2.5 2.7 3.2 15 22 42 87 2045 l.9

10 Tanzania 3.3 3.5 3.4 24 37 75 155 2045 2.0

II BurkinaFaso 2.1 2.6 2.9 8 12 23 48 2045 1.812 Madagascar 2.5 3.3 3.0 II 16 28 49 2035 1.913 Mali 2.1 2.4 3.0 8 11 24 59 2050 1.814 Burundi 1.9 2.8 3.2 5 7 14 29 2045 1.915 Zambia 3.0 3.6 3.5 7 II 23 50 2045 2.0

16 Niger 2.7 3.0 3.2 7 10 22 69 2060 1.917 Uganda 2.9 3.1 3.3 16 24 46 97 2045 2.018 China 2.2 1.2 1.3 1,069 1,269 1,528 1,681 2000 1.519 Somalia 2.7 2.9 3.0 6 8 16 37 2050 1.920 logo 3.0 3.4 3.1 3 5 9 15 2035 2.0

21 India 2.3 2.1 1.8 798 1,010 1,365 1,766 2015 1.722 Rwanda 3.3 3.3 3.8 6 10 23 63 2055 1.923 Sierra Leone 2.0 2.4 2.6 4 5 10 24 2050 1.824 Benin 2.7 3.2 2.9 4 6 II 19 2035 2.025 CentralAfricanRep. 1.8 2.5 2.6 3 4 6 11 2035 1.8

26 Kenya 3.6 4.1 3.9 22 37 83 196 2050 2.127 Sudan 2.8 3.1 2.7 23 33 56 98 2035 1.828 Pakistan 3.1 3.1 3.3 102 156 286 513 2040 1.929 Haiti 2.0 1.8 1.9 6 8 11 16 2025 1.730 Lesotho 2.3 2.7 2.6 2 2 4 6 2030 1.8

31 Nigeria 2.5 3.4 3.0 107 157 286 500 2035 1.932 Ghana 2.2 3.4 3.0 14 20 35 60 2035 1.933 SriLanka 1.8 1.5 1.1 16 19 23 26 1995 1.534 Yemen,PDR 2.1 2.9 3.0 2 3 6 11 2035 1.935 Mauritania 2.3 2.7 2.7 2 3 5 12 2050 1.8

36 Indonesia 2.4 2.1 1.7 171 214 279 345 2005 1.737 Liberia 3.0 3.3 3.0 2 3 6 11 2035 1.938 Afghanistan 2.4 . . . . . . . . . . . . .

39 Burma 2.3 2.2 2.2 39 52 72 97 2015 1.840 Guinea 1.9 2.4 2.4 6 9 16 34 2045 1.8

41 Kampuchea, Dem. 0.342 VietNam 2.6 2.4 65 88 127 168 2015 1.8

Middle-income economies 2.4w 2.2w 1.9w l,038t I,329t 1,862tLower-middle-income 2.5 w 2.3 w 2.1 w 610 t 795 t 1,145

43 Senegal 2.5 2.9 3.1 7 10 20 42 2045 1.944 Bolivia 2.5 2.7 2.7 7 10 16 25 2030 1.845 Zimbabwe 3.1 3.7 3.0 9 13 22 32 2025 2.046 Philippines 2.9 2.5 1.9 58 74 101 127 2010 1.847 YemenArabRep. 2.8 2.6 3.1 8 13 23 44 2040 1.9

48 Morocco 2.5 2.7 2.4 23 32 47 64 2020 1.849 Egypt, Arab Rep. 2.2 2.7 2.3 50 67 99 137 2020 1.850 PapuaNewGuinea 2.3 2.7 2.5 4 5 8 12 2025 1.851 DominicanRep. 2.7 2.4 1.8 7 9 II 14 2010 1.752 Côted'Ivoire 4.2 4.2 3.6 11 18 36 83 2050 1.9

53 Honduras 3.2 3.6 2.9 5 7 Il 17 2025 1.954 Nicaragua 3.1 3.4 3.0 4 5 9 13 2025 1.955 Thailand 2.9 2.0 1.5 54 65 82 98 2000 1.756 ElSalvador 2.7 1.2 2.1 5 6 10 15 2025 1.757 Congo,People'sRep. 2.7 3.3 3.6 2 3 7 17 2050 1.9

58 Jamaica 1.5 1.4 0.8 2 3 3 4 2000 1.459 Guatemala 2.8 2.9 2.8 8 12 20 32 2030 1.860 Cameroon 2.7 3.2 3.2 11 16 33 67 2045 1.961 Paraguay 2.8 3.2 2.7 4 6 9 12 2025 1.862 Ecuador 3.1 2.9 2.2 10 13 19 24 2015 1.8

63 Botswana 3.5 3.4 2.3 1 2 2 3 2010 2.064 Tunisia 2.1 2.6 2.1 8 10 14 17 2010 1.865 Turkey 2.5 2.3 1.9 53 67 90 Ill 2010 1.766 Colombia 2.2 1.9 1.7 29 36 48 57 2005 1.767 Chile 1.7 1.7 1.4 13 15 19 21 2000 1.5

a. For the aasumptions used in the pmjectionu, ace the technical notes.

215

Average annual growth ofpopulation(percent) Population (millions)

Hypotheticalsize of

stationarypopulation

Assumedyear of

reaching netreproduction

Populationmomentum

1965-80 1980-87 1987-2000 1987 2000 2025 (millions) rate of) 1990

68 Peni 2.8 2.3 2.1 20 26 36 46 2010 1.869 Mauritius 1.6 1.0 1.1 I 1 1 2 1985 1.670 Jordan 2.6 3.9 2.8 4 5 9 15 2035 1.971 CostaRica 2.7 2.3 2.0 3 3 4 5 2005 1.772 SyrianArabRep. 3.4 3.6 3.7 11 18 37 69 2040 2.0

73 Malaysia 2.5 2.7 2.2 17 22 30 37 2010 1.774 Mexico 3.1 2.2 1.9 82 105 141 170 2005 1.875 SouthAfrica 2.4 2.3 2.3 33 45 66 90 2020 1.876 Poland 0.8 0.8 0.5 38 40 44 47 1990 1.277 Lebanon 1.6 .

Upper-middle-income 2.1w 1.9w 1.7w 432t 5391 726t

78 Brazil 2.4 2.2 1.8 141 178 234 280 2005 1.779 Uruguay 0.4 0.5 0.7 3 3 4 4 2000 1.380 Hungary 0.4 -0.1 -0.2 11 10 10 10 2030 1.181 Panama 2.6 2.2 1.5 2 3 4 4 2000 1.682 Argentina 1.6 1.4 1.1 31 36 43 49 2005 1.4

83 Yugoslavia 0.9 0.7 0.6 23 25 27 28 2030 1.284 Algeria 3.1 3.1 3.1 23 34 56 84 2025 1.985 Korea, Rep, 2.0 1.4 1.0 42 48 56 57 2030 1.586 Gabon 3.6 4.3 2.6 1 1 3 6 2045 1.787 Portugal 0.6 0.4 0.1 10 10 10 9 2030 1.2

88 Venezuela 3.5 2.8 2.2 18 24 34 42 2010 1.889 Greece 0.7 0.5 0.2 10 10 10 9 2030 1.190 Trinidad and Tobago 1.3 1.6 1.2 1 1 2 2 2000 1.591 Libya 4.3 4.3 3.5 4 6 13 24 2040 1.992 Oman 3.6 4.6 3.6 1 2 4 8 2045 1.8

93 Iran,IslamicRep. 3.2 3.0 3.0 47 69 113 171 2025 1.994 Iraq 3.4 3.6 3.4 17 26 49 83 2035 1.995 Rotnanja 1.1 0.4 0.5 23 24 26 29 1985 1.2

Low- and middle-income 2.3 w 2.0w 1.9w 3,862 4,954 7,023Sub-Saharan Africa 2.7 w 3.2w 3.1 w 443 r 659 t 1,259East Asia 2.3 w 1.5 w 1.5 w 1,513 1,825 2,261South Asia 2.4 w 2.3 w 2.0 w 1,081 l,408t 2,004Europe, M.East, & N.Africa 2.0 w 2.1 w 2.0 w 390 t 505 r 743 1

Latin America & Caribbean 2.5 w 2.2 w 1.8w 404 t 512 t 689 r

17 highly indebted 2.5 w 2.4w 2.1 w 582 t 759 t 1,097

High-income economies 0.9 w 0.7 w 0.5 w 777 t 830 t 883OECD members 0.8 w 0.6 w 0.4 w 747 t 787 t 814

lOther 3.6 w 3.0 w 2.5 w 31 t 42 t 69

96 Spain 1.0 0.5 0.3 39 40 41 37 2030 1.297 Ireland 1.2 0.6 0.5 4 4 4 5 1990 1.398 Saudi Arabia 4.7 4.3 3.8 13 20 42 85 2045 1.899 tlsrael 2.8 1.7 1.4 4 5 7 7 2005 1.5

100 New Zealand 1.3 1.0 0.6 3 4 4 4 2030 1.3

101 tSingapore 1.6 1.1 0.8 3 3 3 3 2030 1.3102 tHong Kong 2.0 1.6 1.0 6 6 7 7 2030 1.3103 Italy 0.6 0.2 -0.1 57 57 53 42 2030 1.1104 United Kingdom 0.2 0.1 0.1 57 57 57 54 2030 1.1105 Australia 1.8 1.4 1.4 16 20 23 23 2030 1.4

106 Belgium 0.3 0.0 0.0 10 10 10 8 2030 1.1107 Netherlands 0.9 0.5 0.3 15 15 15 13 2030 1.1108 Austria 0.3 0.0 -0.1 8 7 7 6 2030 1.1109 France 0.7 0.5 0.4 56 59 61 58 2030 1.1110 Germany,Fed.Rep. 0.3 -0.1 -0.2 61 59 53 43 2030 1.0

Ill Finland 0.3 0.5 0.2 5 5 5 4 2030 1.1112 tKuwait 7.1 4.5 3.1 2 3 4 6 2020 1.8113 Denmark 0.5 0.0 -0.1 5 5 5 4 2030 1.0114 Canada 1.3 1.0 0.8 26 29 31 29 2030 1.3115 Sweden 0.5 0.1 0.0 8 8 8 8 2030 1.0

116 Japan 1.2 0.6 0.4 122 128 125 113 2030 1.1117 tUnited Arab Emirates 15.3 5.2 2.4 1 2 3 3 2020 1.3118 Norway 0.6 0.3 0.3 4 4 4 4 2030 1.1119 UnitedStates 1.0 1.0 0.8 244 269 300 295 2030 1.3120 Switzerland 0.5 0.3 -0.1 7 6 6 5 2030 1.0

Total reporting economies 2.1w 1.8w 1.7w 4,640t 5,7831 7,906tOil exporters 2.7w 2.7w 2.4w 5781 7901 1,228

Nonreporting nonmembers 1.0 w 1.0 w 371 t 410 I 474

Table 27. Demography and fertifity

216

Note; For data comparability and coverage, see the technical notes. Figures in italics are for yeura other than those upecified.

Crude birthrate perthouoand

population

Crude deathrate per

thousandpopulation

Percentage ofwomen of

childbearing age Totalfertility rate

Percentage ofmarried women ofchildbearing age

using contraception

1965 1987 1965 1987 1965 1987 1965 1987 2tXlO 1970 1985

Low-income economies 42w31w 16w 10w 46w SOw 6.3w 4.0w 3.3wChina and India 41w 26w 14w 9w 46w 52w 6.3w 3.2w 2.5wOther low-income 46w 41w 21w 13w 46w 46w 6.4w 5.6w 4.7w

1 Ethiopia 43 48 20 18 46 46 5.8 6.5 5.7 22 Bhutan 42 39 23 17 48 48 6,0 5.5 5.33 Chad 45 44 28 20 47 46 6.0 5.9 6.04 Zaire 47 45 21 14 46 45 6.0 6.1 5.8 .

5 Bangladesh 47 41 21 15 44 46 6.8 5.5 4.3 25

6 Maluwi 56 53 26 20 46 44 7.8 7.6 7.6 .

7 Nepal 46 41 24 15 50 46 6.0 5.9 4.6 158 Lao PDR 45 42 23 16 47 47 6.2 5.7 5.09 Mozambique 49 45 27 17 47 46 6.8 6.3 6.1 .

10 Tanzuniu 49 50 22 14 45 43 6.6 7.0 6.0 .

II Burkinu Faso 48 47 26 18 47 46 6.4 6.5 6.212 Madagascar 47 46 22 14 47 44 6.6 6.4 5.113 Mali 50 51 27 20 46 45 6.5 7.0 6.9 . . 614 Burundi 47 49 24 18 48 46 6.4 6.8 6.0 915 Zambia 49 50 20 13 45 44 6.6 6.8 6.0 .

16 Niger 48 51 29 20 43 44 6.8 7.0 7.217 Uganda 49 50 19 17 44 43 6.9 6.9 6.1 1

18 China 38 21 10 7 44 55 6.4 2.4 2.1 7719 Somalia 50 49 26 19 45 44 6.7 6.8 6.5 220 logo 50 49 23 14 46 44 6.5 6.5 5.2

21 India 45 32 21 11 47 48 6.2 4.3 3.1 12 3522 Rwandu 52 52 17 18 45 43 7.5 8.0 7.223 Sierra Leone 48 48 32 23 47 46 6.4 6.5 6.5 . . 424 Benin 49 48 25 16 44 44 6.8 6.5 5.2 . . 625 CentrulAfricunRep. 34 43 24 16 47 46 4.5 5.8 5.2 .

26 Kenya 52 52 20 11 40 40 8.0 7.7 6.5 1 1727 Sudan 47 44 24 16 46 45 6.7 6.4 5.428 Pakistan 48 47 21 12 43 46 7.0 6.7 5.4 . S 1129 Haiti 43 34 20 13 47 49 6.2 4.7 3.8 . . 530 Lesotho 42 41 18 13 47 45 5.8 5.8 4.5

31 Nigeria 51 47 23 15 45 43 6.9 6.5 5.4 532 Ghana 47 46 17 13 45 44 6.9 6.4 5.1 .

33 SriLanka 33 23 8 6 47 53 4.9 2.7 2.1 6234 Yemen, PDR 50 48 27 16 45 46 7.0 6.7 5.435 Mauritania 47 48 27 19 47 45 6.5 6.5 6.5 . .

36 Indonesia 43 29 20 9 47 50 5.5 3.5 2.5 4837 Liberia 46 45 21 13 46 44 6.3 6.5 5.2 738 Afghanistan 53 . . 29 . . 49 . . 7.1 . 239 Burma 40 32 18 10 46 49 5.8 4.3 3.340 Guinea 46 47 30 23 47 46 5.9 6.2 6.2

41 Kampuchea, Dem. 44 . . 20 . . 47 . . 6.342 VietNam 34 . . 8 47 4.4 3.1 iiMiddle-income economies 38 w 30 w 13w 8w 45w 49w 5.5w 3.9w 3.1w

Lower-middle-income 41 w 32 w 14w 8w 44w 49w 6.2w 4.1w 3.2w43 Senegal 47 46 23 18 46 44 6.4 6.5 6.2 1244 Bolivia 46 43 21 14 46 46 6.6 6.1 4.8 2645 Zimbabwe 55 44 17 11 42 45 8.0 5.9 4.3 . . 4046 Philippines 42 30 12 8 44 49 6.8 3.9 2.7 2 4447 YemenArabRep. 49 48 27 16 46 44 7.0 7.0 5.7 .

48 Morocco 49 35 18 10 45 48 7.1 4.8 3.4 1 3649 Egypt, Arab Rep. 44 36 19 10 43 47 6.8 4.8 3.6 3250 Pupua New Guinea 43 39 20 12 47 47 6.3 5.7 4.4 .

51 DominicunRep. 47 31 14 7 43 50 7.0 3.8 2.7 . . 5052 Côte d'Ivoire 52 51 22 15 44 44 7.4 7.4 6.4 .

53 Honduras 51 40 17 8 44 45 7.4 5.6 4.2 . . 3554 Nicaragua 49 41 16 8 43 45 7.2 5.5 4.2 .

55 Thailand 41 25 10 7 44 53 6.3 2.8 2.2 15 6556 ElSulvador 47 36 14 8 44 45 6.7 4.9 3.8 4857 Congo, People's Rep. 42 47 18 11 47 43 5.7 6.5 6.3

58 Jamaica 38 26 9 6 42 50 5.4 2.9 2.1 5259 Guatemala 47 41 17 9 44 44 6.7 5.8 4.5 . . 2360 Cameroon 40 45 20 13 46 42 5.2 6.5 5.861 Paraguay 41 35 8 6 41 49 6.6 4.6 3.7 4962 Ecuador 45 33 14 7 43 48 6.8 4.3 3.0 44

63 Botswana 53 35 19 10 45 45 6.9 5.0 3.1 . . 2964 Tunisia 44 30 17 7 43 49 7.0 4.1 2.8 10 4165 Turkey 41 30 15 9 44 50 5.9 3.8 2.8 . . 5066 Colombia 45 26 14 7 43 52 6.3 3.2 2.4 . . 6367 Chile 34 24 II 6 45 53 4.9 2.7 2.1

a. Figuras include women whose husbands practice contraception; see the technical note.

217

Crude birthrate per

thousandpopulation

Crude deathrate per

thousandpopulation

Percentage ofwomen of

childbearing age Total ferttlitv rate

Percentage ofmarried women ofchildbearing age

using contraception

1965 1987 1965 1987 1965 1987 1965 1987 2000 1970 1985

68 Pens 45 31 17 9 44 49 6.7 4.! 2.9 4669 Maurilius 36 20 8 7 45 54 5.0 2.1 2.1 7870 Jordan 53 43 21 7 45 44 8.0 6.5 5.2 2671 Costa Rica 45 28 8 4 42 52 6.4 3.3 2.4 6672 Syrian Arab Rep. 48 45 16 7 41 43 7.6 6.8 5.5

73 Malaysia 41 31 12 6 43 51 6.3 3.8 2.8 7 5174 Mexico 45 29 II 6 43 50 6.7 3.6 2.5 5375 South Africa 40 35 16 10 46 47 6.1 4.5 3.576 Poland 17 16 7 10 47 48 2.5 2.2 2.177 Lebanon 41 13 42 6.2 55

Upper-middle-income 33w 27w 11w 8w 46w 50w 4.7w 3.5w 2.8w

78 Brazil 39 28 11 8 45 51 5.7 3.5 2.5 6579 Uruguay 21 19 10 11 49 46 2.9 2.6 2.180 Hungaly 13 12 11 14 48 47 1.8 1.8 1.8 7381 Panama 40 27 9 5 44 51 5.8 3.1 2.2 6182 Argentina 23 21 9 9 50 47 3.1 3.0 2.3

83 Yugoslavia 21 15 9 9 50 50 2.7 2.0 2.0 5984 Algeria 50 39 18 9 44 45 7.4 5.9 4.4 .

85 Korea,Rep. 36 20 11 6 46 55 4.9 2.l 1.9 32 7086 Gabon 31 42 22 16 49 47 4.1 5.5 6.087 Portugal 23 12 10 10 48 48 3.1 1.5 1.6

88 Venezuela 42 31 8 5 44 50 6.2 3.8 2.789 Greece 18 12 8 10 51 47 2.3 1.7 1,790 TrinidadandTobago 34 26 8 7 46 53 4.4 2.8 2.1 5491 Libya 49 44 18 9 45 44 7.3 6.9 5.692 Oman 50 46 24 12 46 44 7.2 7.2 5.9

93 Iran,IslamicRep. 46 41 18 9 42 47 7.1 5.6 4.494 Iraq 49 43 18 8 45 44 7.2 6.4 5.195 Romania IS 15 9 II 50 48 1.9 2.1 2.1

Low- and middle-income 41 w 30 w 15 w 10 w 46w 50 w 6.1 w 4.0 w 3.3 wSub-Saharan Africa 48w 47w 22w 16w 45w 44w 6.6w 6.6w 5.8wEast Asia 39 w 23 w 11 w 7 w 45 w 54 w 6.2 w 2.7 w 2.3 wSouth Asia 45 w 34 w 20 w 12 w 47 w 48 w 6.3 w 4.6 w 3.5 wEurope, M.East, & N.Africa 35 w 31 w 15 w lOw 46w 47w 5.1 w 4.3 w 3.7wLatin America & Caribbean 40 w 29w 12 w 7 w 45 w 50 w 5.8 w 3.6 w 2.7 w

17 highly indebted 41 w 32 w 14 w 9w 45 w 49 w 5.9 w 4.2 w 3.2 w

High-income economies 19w 14w 10w 9w 47w 50w 2.8w 1.8 w 1.9wOECD members 19w 13 w 10 w 9w 47w 50w 2.7 w 1.7 w 1.7 w

tOther 36w 30w 11 w 7 w 45 w 48w 5.5 w 4.6w 4.1 w

96 Spain 21 12 8 9 49 48 2.9 1.6 1.697 Ireland 22 17 12 9 42 48 4.0 2.3 2.198 ISaudi Arabia 48 42 20 8 44 42 7.3 7.2 5.999 tlsrael 26 22 6 7 46 48 3.8 2.9 2.3

100 NewZealand 23 16 9 9 45 52 3.7 1.9 1.9

101 tSingapore 31 17 6 6 45 60 4.7 1.7 1.7 45 74102 tHong Kong 28 16 6 6 45 55 4.7 1.8 1.8 50 72103 Italy 19 10 10 10 48 49 2.7 1.3 1.4104 UnitedKingdom 18 13 12 12 45 48 2.9 1.8 1.8 .

105 Australia 20 15 9 8 47 52 3.0 1.9 1.9 67

106 Belgium 17 12 12 12 44 48 2.6 1.6 1.6 8]107 Netherlands 20 13 8 9 47 52 3.0 1.6 1.6 . . 72108 Austria 18 II 13 12 43 48 2.7 1.5 1.5 71109 France 18 14 11 10 43 48 2.8 1.8 1.8 . .

110 Germany,Fed.Rep. 18 10 12 12 45 49 2.5 1.4 1.4 78

Ill Finland 17 12 10 10 48 50 2.4 1.6 1.6 . . 77112 tKuwait 47 33 8 3 46 49 7.4 4.8 3.7 . .

113 Denmark 18 II 10 12 47 50 2.6 1.5 1.6 67114 Canada 21 15 8 8 47 53 3.1 1.7 1.7 73115 Sweden 16 12 10 13 47 47 2.4 1.9 1.9 . . 78

116 Japan 19 11 7 7 56 50 2.0 1.7 1.7 .. 64117 tUnited Arab Emirates 41 23 15 4 47 47 6.8 4.8 3.7118 Norway 18 13 10 11 45 48 2.9 1.8 1.8 . . .

119 UniledStates 19 16 9 9 45 51 2.9 1.9 1.9 65 68120 Switzerland 19 12 10 10 48 50 2.6 1.6 1.6 70

Total reporting economies 36w 28w 14w lOw 46w 50w 5.4w 3.6w 3.1wOil exporters 45 w 36w 18 w lOw 45 w 47 w 6.4w 4.8w 3.8w

Nonreporting nonmembers 20w 20w 8w lOw 47w 47w 2.7w 2.5w 2.3w

Table 28. Health and nutrition

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

218

Population per. Daily calorie supplyper capita

Babies with lowbirth weights

1985

Physician Nursing person

1965 1984 1965 1984 1965 1986

Low-income economies 9,790 w 5,410 w 6,010 w 2,150w 1,993w 2,384wChina and India 2,930 w 1,640 w 4,420 w 1,700 w 2,001 w 2,463 wOther low-income 28,190 w 13,550 w 10,170w 3,130w 1,976 w 2,227 w

I Ethiopia 70,190 77,360 5,970 5,290 1,824 1,7492 Bhutan 23,310 2,9903 Chad 72,480 38,360 13,610 3,390 2,399 1,717 II4 Zaire 35,130 2,187 2,1635 Bangladesh 8,100 6,730 8,980 1,972 1,927 31

6 Malawi 47.320 11,560 3,130 2,244 2,310 107 Nepal 46,180 32,710 87,650 4,680 1,901 2,0528 LaoPDR 24,320 1,360 4,880 530 1,956 2,391 399 Mozambique 18,000 37,950 5,370 5,760 1,979 1,595 15

10 Tanzania 21,700 2,100 1,832 2,192 14

11 BurkinaFaso 73,960 57,180 4,150 1,680 2,009 2,139 1812 Madagascar 10,620 10,000 3,650 2,462 2,440 1013 Mali 51,510 25,390 3,360 1,350 1,859 2,074 1714 Burundi 55,910 21,120 7,320 3,040 2,391 2,343 1415 Zambia 11,380 7,100 5,820 740 14

16 Niger 65,540 38,770 6,210 450 1,994 2,432 2017 Uganda 11,110 21,900 3,130 2,060 2,360 2,344 1018 China 1,600 1,000 3,000 1,700 1,926 2,630 619 Somalia 36,840 16,090 3,950 1,530 2,167 2,13820 Toga 23.240 8,720 4,990 1,240 2,378 2,207 20

21 India 4,880 2,520 6,500 1,700 2,111 2,238 3022 Rwanda 72,480 34,680 7,450 3,650 1,665 1,830 1723 SierraLeone 16,840 13,630 4,470 1,090 1,837 1,855 1424 Benin 32,390 15,940 2,540 1,750 2,009 2,184 1025 CentralAfricanRep. 34,020 23,070 3,000 2,170 2,135 1,949 15

26 Kenya 13,280 10,100 1,930 950 2,289 2,060 1327 Sudan 23,500 10,110 3,360 1,250 1,938 2,208 1528 Pakistan 2,900 9,910 4,900 1,761 2,315 2529 Haiti 14,000 7,180 12,890 2,290 2,000 1,902 1730 Lesotho 20,060 18,610 4,700 2,065 2,303 10

31 Nigeria 29,530 7,980 6,160 1,020 2,185 2,146 2532 Ghana 13,740 14,890 3,730 640 1,950 1,759 1733 SriLanka 5,820 5,520 3,220 1,290 2,153 2,401 2834 Yemen, PDR 12,870 4,340 1,850 1,060 1,982 2,299 1335 Mauritania 36,470 12,110 . . 1,200 2,064 2,322 10

36 Indonesia 31,700 9,460 9,490 1,260 1,800 2,579 1437 Liberia 12,360 9,240 2,290 1,360 2,154 2,38138 Afghanistan 15,770 . 24,430 . . 2,29439 Burma 11,860 3,740 11,370 900 1,917 2,609 1640 Guinea 54,430 57,390 4,750 6,380 1,923 1,777 18

41 Kampuchea,Dem. 22,410 . . 3,670 . . 2,276 .

42 VietNam . . 1,000 . . 620 . . 2,297 18

Middle-income economies 4,030 w 2,390 w 2,170w 980 w 2,463 w 2,855 wLower-middle-income 5,370 w 3,330 w 1,810w 1,070 w 2,394w 2,777w

43 Senegal 21,130 13,450 2,640 2,090 2,479 2,350 1044 Bolivia 3,300 1,540 3,990 2,480 1,869 2,143 1545 Zimbabwe 8,010 6,700 990 1,000 2,105 2,132 1546 Philippines 6,700 1,130 2,740 1,924 2,372 1847 YemenArabRep. 58,240 6,270 . 2,680 2,008 2,318 9

48 Morocco 12,120 15,610 2,290 920 2,167 2,915 949 Egypt, Arab Rep. 2,300 790 2,030 800 2,400 3,342 750 Papua New Guinea 12,640 6,160 620 890 1,905 2,205 2551 Dominican Rep. 1,700 1,760 1,640 1,210 1,872 2,477 1652 Côte d'Ivoire 20,640 . . 2,000 . . 2,360 2,562 14

53 Honduras 5,370 1,510 1,530 670 1,963 2,068 2054 Nicaragua 2,560 1,500 1,390 530 2,398 2,495 1555 Thailand 7,160 6,290 4,970 710 2,101 2,331 1256 ElSalvador . . 2,830 1,300 930 1,859 2,160 1557 Congo,People'sRep. 14,210 8,140 950 570 2,259 2,619 12

58 Jamaica 1,990 2,060 340 490 2,231 2,590 859 Guatemala 3,690 2,180 8,250 850 2,027 2,307 1060 Cameroon 26,720 . . 5,830 . 2,079 2,028 1361 Paraguay 1,850 1,460 1,550 1,000 2,627 2,853 662 Ecuador 3,000 830 2,320 620 1,940 2,058 10

63 Botswana 27,460 6,910 17,720 700 2,019 2,201 864 Tunisia 8,000 2,150 370 2,202 2,994 765 Turkey 2,900 1,380 . . 1,030 2,659 3,229 766 Colombia 2,500 1,190 890 630 2,174 2,543 1567 Chile 2,120 1,230 600 370 2,592 2,579 7

219

Population per. Daily calorie supplyper capita

Babies with lowbirth weights

erceflt)1985

Physician Nursing person

1965 1984 1965 1984 1965 1986

68 Pens 1,650 1,040 -- 2,325 2,246 969 Mauritius 3,930 1,900 2,030 580 2,272 2,748 970 Jordan 4,710 1,140 1,810 1,300 2,314 2,991 771 Costa Rica 2,010 960 630 450 2,366 2,803 972 SyrianArabRep. 5,400 1,260 1,440 2,195 3,260 9

73 Malaysia 6,200 1,930 1,320 1,010 2,247 2,730 974 Mexico 2,080 1,240 980 880 2,644 3,132 1575 South Africa 2,050 . . 490 . 2,623 2,924 1276 Poland 800 490 410 190 3,229 3,336 877 Lebanon 1,010 2,030 2,489

Upper-middle-income 2,430 w 1,170 w 2,590 w 870 w 2,556 w 2,970 w

78 Brazil 2,500 1,080 3,100 1,210 2,402 2,656 879 Uniguay 880 510 590 . 2,812 2,648 880 Hungaiy 630 310 240 170 3,171 3,569 tO81 Panama 2,130 980 1,600 390 2,255 2,446 882 Argentina 600 370 610 980 3,210 3,210 6

83 Yugoslavia 1,200 550 850 260 3,289 3,563 784 Algeria 8,590 2,330 11,770 330 1,681 2,715 985 Korea, Rep. 2,680 1,170 2,970 590 2,256 2,907 986 Gabon 2,790 760 270 1,881 2,521 1687 Portugal 1,240 410 1,160 . . 2,517 3,151 8

88 Venezuela 1,210 700 560 2,321 2,494 989 Greece 710 350 600 450 3,049 3,688 690 Trinidadandlobago 3,810 960 560 260 2,497 3,08291 Libya 3,860 690 850 350 1,925 3,601 592 Oman 23,790 1,700 6,420 770 . . 14

93 Iran,IslamicRep. 3,800 2,690 4,170 1,050 2,204 3,313 994 Iraq 5,000 1,740 2,910 1,660 2,150 2,932 995 Rornania 760 570 400 280 2,978 3,373 6

Low- and middle-income 8,300 w 4,630 w 5,030w 1,860w 2,116w 2,509 wSub-Saharan Africa 33,840 w 23,760 w 5,460 w 2,130w 2,096w 2,101 wEast Asia 5,600w 2,400 w 4,060 w 1,560w 1,937w 2,594 wSouth Asia 6,220 w 3,570 w 8,380w 2,710 w 2,060 w 2,228 wEurope, M.East, & N.Africa 4,820 w 2,440 w 3,410w 1,160w 2,610 w 3,177wLatin America & Caribbean 2,370w 1,230w 2,090w 1,010w 2,457 w 2,701 w

17 highly indebted 7,930w 3,440 w 2,460 w 1,160w 2,422 w 2,635 w

High-income economies 940 w 470 w 470w 130w 3,083 w 3,375 wOECD members 870 w 450 w 420w 130 w 3,100 w 3,390 w

tOther 4,430 w 800 w 2,590w 260w 2,324 w 3,001 w

96 Spain 800 320 1,220 260 2,822 3,35997 Ireland 950 680 170 140 3,546 3,632 498 tSaudi Arabia 9,400 690 6,060 320 1,853 3,004 699 tlsrael 400 350 300 110 2,784 3,061 7

100 New Zealand 820 580 570 80 3,237 3,463 5

101 tSingapore 1,900 1,310 600 . . 2,297 2,840 7102 tHong Kong 2,520 1,070 1,250 240 2,504 2,859 4103 Italy 1,850 230 790 . 3,091 3,523 7104 United Kingdom 870 . 200 120 3,353 3,256 7105 Australia 720 440 150 110 3,118 3,326 6

106 Belgium 700 330 590 110 . . 5107 Netherlands 860 450 270 170 3,108 3,326 4108 Austria 720 390 350 180 3,231 3,428 6109 France 830 320 380 110 3,217 3,336 5110 Germany,Fed.Rep. 640 380 500 230 3,102 3,528 5

111 Finland 1,300 440 180 60 3,111 3,122 4112 tKuwait 790 640 270 200 2,945 3,021 7113 Denmark 740 400 190 60 3,395 3,633 6114 Canada 770 510 190 120 3,212 3,462 6115 Sweden 910 390 310 100 2,888 3,064 4

116 Japan 970 660 410 180 2,687 2,864 5117 jUnited Arab Emirates . 1,010 . 390 2,705 3,733118 Norway 790 450 340 60 3,032 3,223 4119 United States 670 470 310 70 3,224 3,645 7120 Switzerland 710 700 270 130 3,412 3,437 5

Total reporting economies 6,650w 3,930w 4,010 w 1,570 w 2,322 w 2,655 wOil exporters 17,940w 5,120w 5,740w 1,010w 2,128w 2,738w

Nonreporting nonmembers 770 w 2,210 w 370 w 290 w 3,130 w 3,358 w

Table 29. Education

220

Note: For data comparability and coverage, sec thc technical notes. Figures in italics are for years other than those specified.

Percentage of age group enrolled in education

Primary SecondaryTertiary

TotalTotal Male Female Total Male Female

1965 1986 1965 1986 1965 1986 /965 1986 1965 1986 1965 1986 1965 1986

Low-income economies 73w 103w 113w 92 w 20w 35w 42w 27w 2w 3w'China and India 83w 113w 124w 101w 25w 39w 47w 30w 2w 2w'Other low-income 49w 76w 60w 83w 37w 68w 9w 25w 13w 29w 5w 20w 1w 4w'

1 Ethiopia 11 36 16 44 6 28 2 /2 3 14 1 9 0 1

2 Bhutan 7 23 13 29 I 17 0 4 0 7 1 03 Chad 34 43 56 61 13 24 I 6 3 tO 0 2 04 Zaire 70 95 45 5 8 2 0 25 Bangladesh 49 60 67 69 31 50 13 18 23 24 3 II 1 5

6 Malawi 44 64 55 72 32 55 2 4 3 6 1 3 0 I

7 Nepal 20 79 36 104 4 47 5 25 9 35 2 11 1 58 Lao PDR 40 94 50 102 30 85 2 19 2 23 1 /6 0 29 Mozambiquc 37 82 48 92 26 73 3 7 3 9 2 5 0 0

10 Tanzania 32 69 40 70 25 69 2 3 3 4 1 3 0 0

II BurkinaFaso 12 35 16 45 8 26 I 6 2 8 1 4 0 1

12 Madagascar 65 121 70 125 59 118 8 36 10 43 5 30 I 513 Mali 24 22 32 27 16 16 4 7 5 9 2 4 0 1

14 Burundi 26 59 36 68 15 50 I 4 2 6 I 3 0 /15 Zambia 53 104 59 112 46 101 7 /9 II 24 3 14 2

16 Niger 11 29 15 37 7 20 1 6 1 9 0 3 /17 Uganda 67 83 50 4 6 2 0 1

18 China 89 129 137 120 24 42 48 35 0 219 Somalia 10 20 16 26 4 13 2 12 4 15 1 8 0 420 Togo 55 102 78 125 32 78 5 21 8 32 2 10 0 2

21 India 74 92 89 107 57 76 27 35 41 45 13 24 522 Rwanda 53 67 64 68 43 66 2 3 3 4 1 2 023 Sierra Leone 29 37 21 5 8 3 024 Benin 34 65 48 87 21 43 3 16 5 23 2 9 025 CentralAfrican Rep. 56 66 84 81 28 50 2 13 4 19 I 7

26 Kenya 54 94 69 97 40 91 4 20 6 25 2 15 0 127 Sudan 29 50 37 59 21 41 4 20 6 23 2 17 I 228 Pakistan 40 44 59 55 20 32 12 18 18 25 5 10 2 529 Haiti 50 78 56 83 44 72 5 18 6 19 3 17 0 I30 Lesotho 94 /15 74 /02 114 127 4 22 4 18 4 26 0 2

31 Nigeria 32 39 24 5 7 3 0 332 Ghana 69 63 82 75 57 59 13 35 19 45 7 27 I 233 SriLanka 93 103 98 104 86 102 35 66 34 63 35 70 2 434 Yemen,PDR 23 35 10 II 17 535 Mauritania 13 46 19 57 6 35 1 15 2 21 0 8 0

36 Indonesia 72 118 79 121 65 116 12 41 18 45 7 34 1 737 Liberia 41 59 . . 23 5 8 338 Afghanistan 16 26 . 5 2 4 1 039 Burma 71 . . 76 . . 65 . . 15 . 20 . . II . .

40 Guinea 31 29 44 40 19 17 5 9 9 14 2 5 0 1

41 Kampuchea,Dem. 77 98 . . 56 . 9 . . 14 . 4 . .

42 VietNam 100 . 107 94 43 44 41

Middle-income economies 93w 104w 99w 108w 86w 100w 26w 54w 30w 62w 22w 56w 6w 18wLower-middle-income 89w 104w 96w 108w 81w 100w 24w 51w 28w 57w 21w 50w 6w 17w

43 Senegal 40 55 52 66 29 45 7 13 10 18 3 9 1 244 Bolivia 73 87 86 93 60 82 18 37 21 40 15 34 5 1945 Zimbabwe 110 129 128 132 92 126 6 46 8 55 5 37 0 446 Philippines 113 106 115 107 111 106 41 68 42 66 40 69 19 3847 YemenArabRep. 9 79 16 125 1 31 0 15 . 26 3

48 Morocco 57 79 78 96 35 62 II 34 16 39 5 27 1 949 Egypt,ArabRep. 75 87 90 96 60 77 26 66 37 77 15 54 7 2150 Papua New Guinea 44 . . 53 . . 35 . . 4 . . 6 . . 2 . . . . 251 DominicanRep. 87 133 87 131 87 135 12 47 11 43 12 56 2 1952 Côted'Ivoire 60 78 80 92 41 65 6 20 10 27 2 12 0 3

53 Honduras 80 102 81 103 79 102 10 36 11 31 9 36 1 1054 Nicaragua 69 98 68 93 69 103 14 42 15 27 13 57 2 955 Thailand 78 99 82 . 74 . . 14 29 16 . II . . 2 2056 ElSalvador 82 70 85 69 79 70 17 24 18 23 17 26 2 1457 Congo,People'sRep. 114 134 . 94 . 10 15 . 5 I

58 Jamaica 109 . . 112 . . 106 . SI . 53 . 50 3 459 Guatemala 50 76 55 82 45 70 8 20 10 . 7 . . 2 960 Cameroon 94 107 114 1/6 75 97 5 23 8 29 2 18 0 261 Paraguay 102 99 109 102 96 97 13 30 13 30 13 29 4 1062 Ecuador 91 114 94 . . 88 17 55 19 . . 16 3 33

63 Botswana 65 105 59 101 71 109 3 31 5 29 3 33 . . 264 Tunisia 91 118 116 127 65 108 16 39 23 45 9 33 2 665 Turkey 101 117 118 121 83 113 16 44 22 56 9 33 4 1066 Colombia 84 114 83 112 86 115 17 56 18 55 16 56 3 1367 Chile 124 110 125 110 122 109 34 70 31 67 36 73 6 16

221

96 Spain 115 101 117 104 114 103 38 98 46 95 29 10/ 6 3297 Ireland 108 100 107 100 108 100 51 96 53 91 50 101 12 2298 tSaudi Arabia 24 71 36 78 II 65 4 44 7 52 I 35 1 1399 tlsrael 95 99 95 98 95 100 48 79 46 75 5! 83 20 33

100 New Zealand 106 105 107 106 104 104 75 84 76 83 74 86 15 33

101 ISingapore 105 115 110 118 100 113 45 71 49 70 41 73 10102 tHong Kong 103 105 106 106 99 104 29 69 32 66 25 72 5 13103 Italy 112 97 113 99 110 99 47 76 53 74 41 74 11 25104 United Kingdom 92 106 92 105 92 106 66 85 67 83 66 87 12 22105 Australia 99 106 99 106 99 105 62 96 63 95 6! 98 16 29

106 Belgium 109 96 110 95 108 97 75 96 77 95 72 97 15 32107 Netherlands 104 114 104 113 104 115 61 104 64 106 57 102 17 32108 Austria 106 100 106 100 105 100 52 79 52 78 52 80 9 28109 France 134 112 135 113 133 111 56 95 53 92 59 99 18 30110 Germany, Fed. Rep. 97 97 97 72 71 74 9 30

Ill Finland 92 104 95 104 89 104 76 102 72 95 80 110 II 35112 tKuwait 116 98 129 99 103 96 52 82 59 84 43 79 . . 16113 Denmark 98 98 97 98 99 98 83 105 98 105 67 lOS 14 29114 Canada 105 105 106 106 104 104 56 103 57 103 55 103 26 55115 Sweden 95 99 94 97 96 99 62 83 63 79 60 88 13 37

116 Japan 100 102 100 101 100 102 82 96 82 95 81 97 13 29117 limited Arab Emirates . . 100 . 99 . . 101 . . 59 . . 54 . . 66 0 8118 Norway 97 98 97 97 98 97 64 97 66 95 62 100 11 28119 United States . . 102 . . 103 . . 101 . . 100 . 100 . . 100 40 59120 Switzerland 87 87 87 37 38 . . 35 8 23

Total reporting economies 82w 103w 88w 110w 70w 95w 28w 50w 35w 55w 23w 45w 7w 14wOil exporters 68w 110w 78w 114w 59w 105w 15w 49w 20w 54w lOw 43w 2w lOw

Nonreporting nonmembers 102 w 105 w 103 w . 102 w 66 w 92 w 60 w 72w . 27w 21w

Percentage ofage group enrolled in education

Primary SecondanTertiary

TotalTotal Male Female Total Male Female

1965 1986 1965 1986 1965 1986 1965 1986 1965 1986 1965 1986 1965 /986

68 Pem 99 122 108 125 90 120 25 65 29 68 21 61 8 2569 Mauritius 10! 106 105 105 97 106 26 51 34 53 18 49 3 1

70 Jordan 95 105 83 38 52 23 271 Costa Rica 106 102 107 103 105 101 24 42 23 41 25 44 6 2472 SyrianArabRep. 78 III 103 117 52 105 28 60 43 72 13 49 8 17

73 Malaysia 90 101 96 100 84 99 28 54 34 54 22 54 2 674 Mexico 92 114 94 115 90 113 17 55 2! 56 13 54 4 1675 South Africa 90 91 88 15 16 14 476 Poland 104 10! 106 101 102 101 69 80 70 78 69 81 18 1777 Lebanon 106 118 . 93 26 33 . 20 14

Upper-middle-income 97 w 104 w 102 w 107 w 93 w 101 w 28 w 59 w 32 w 71 w 24 w 67 w 6w 20 w

78 Brazil 108 105 109 . . 108 . . 16 36 16 16 . 279 Umguay 106 110 106 111 106 109 44 71 42 . . 46 . 8 4280 Hungary 101 98 102 97 100 98 . 70 . 70 . . 71 13 158! Panama 102 106 104 109 99 104 34 59 32 56 36 63 7 2882 Argentina 101 109 101 109 102 109 28 74 26 68 31 79 14 39

83 Yugoslavia 106 95 108 95 103 94 65 82 70 84 59 80 13 1984 Algeria 68 95 81 105 53 85 7 54 10 62 5 45 I 785 Korea, Rep. 10! 94 103 94 99 94 35 95 44 98 25 93 6 3386 Gabon 134 126 146 127 122 125 11 27 16 31 5 22 . . 487 Portugal 84 117 84 131 83 123 42 52 49 47 34 56 5 13

88 Venezuela 94 110 93 110 94 110 27 46 27 41 28 50 7 2689 Greece 110 106 III 106 109 106 49 88 57 89 4! 87 10 2490 Trinidad and Tobago 93 95 97 93 90 96 36 76 39 74 34 79 2 491 Libya 78 . . Ill . . 44 . . 14 . . 24 . . 4 . . 1 1)92 Oman 94 101 86 35 45 . . 25 2

93 Iran, Islamic Rep. 63 117 85 127 40 107 18 47 24 56 II 38 2 594 Iraq 74 99 102 107 45 91 28 52 42 65 14 39 495 Romania 101 97 102 98 100 97 39 79 44 74 32 76 10 11

Low- and middle-income 78 w 103 w 84w 112w 62w 94w 22 w 40 w 28 w 47 w 14 w 34 w 3w 7wSub-Saharan Africa 41w 66 w 52w 73w 31w 58w 4w 16 w 6 w 20 w 2w 12w Ow 2 wEast Asia 88 w 123 w 131w 117w 23 w 45 w 50 w 39 w 1 w 5 wSouth Asia 68 w 84 ss' 83w 98w 52w 69w 24 w 32 w 36 w 41w 12 w 22 w 4w 5 wEurope, M.East, & N.Africa 83 w 97 w 94w 104w 71w 91w 32 w 56 w 38 w 62 w 26 w 49 w 7w 13 wLatin America & Caribbean 98 w 108 w 99w 110w 96w 108w 19w 48 w 20 w 54 w 19 w 56 w 4 w 20 w

17 highly indebted 88 w 106w 91 w 109 w 84w 104 w 21 w 52 w 23 w 59 w 20 w 58 w 5 w 18 w

High-income economies 105 w 102 w 106 w 103 w 105 w 102 w 62 w 92 w 63 w 91 w 60 w 93 w 21 w 39 wOECD members 107 w 102 w 107 w 103 w 106 w 102 w 63 w 93 w 64 w 92 w 61 w 94 w 21 w 39 w

tOther 74w 90w 80w 94w 67w 87w 27w 61w 29w 63w 24w 59w 7w 17w

Table 30. Income distribution and ICP estimates of GDP

Low-income economiesChina and IndiaOther low-income

Middle-income economiesLower-middle-income

222

ICP estimates of Percentage shareof household income, by percentile groups ofhouseholds

GDPper capita, 1985 Lowest Second Third Fourth Highest Highest(US = 100) Year 20 percent quintile quintile quintile 20 percent 10 percent

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

I Ethiopia 1.62 Bhutan3 Chad4 Zaire5 Bangladesh 1981-82 6.6 10.7 l51 22.1 45.3 29.5

6 Malawi 3.67 Nepal8 LaoPDR9 Mozambique

10 Tanzania 2.6

11 BurkinaFaso . . . .

12 Madagascar 3.9 .

13 Mali 2.414 Burundi . . . . . . . . . . . . .

15 Zambia 4.7 1976 3.4 7.4 11.2 16.9 61.1 46.4

16 Niger17 Uganda18 China19 Somalia20 Togo

21 India 4.7 1975-76 7.0 9.2 13.9 20.5 49.4 33.622 Rwanda 3.823 Sierra Leone 3.024 Benin 6.5 . . .

25 Central African Rep. .

26 Kenya 5.3 1976 2.6 6.3 11.5 19.2 60.4 45.827 Sudan28 Pakistan29 Haiti30 Lesotho

31 Nigeria 7.232 Ghana33 SriLanka 11.7 1980-81 5.8 10.1 14.1 20.3 49.8 34.734 Yemen, PDR35 Mauritania

36 Indonesia 1976 6.6 7.8 12.6 23.6 49.4 34.037 Liberia38 Afghanistan .

39 Burma . . . . . 0

40 Guinea

41 Kampuchea, Dem.42 VietNam

43 Senegal44 Bolivia45 Zimbabwe

7.0

9.9 . .

.

. . 0 . .

46 Philippines 1985 5.2 8.9 13.2 20.2 52.5 37.047 Yemen Arab Rep.

48 Morocco 13.1 0 . . . . . . . .

49 Egypt, Arab Rep. 15.8 1974 5.8 10.7 14.7 20.8 48.0 33.250 Papua New Guinea51 Dominican Rep. . . . . . . 0 . . .

52 Côted'Ivoire 10.2 1985-86 2.4 6.2 10.9 19.1 61.4 43.7

52 Honduras . 0

54 Nicaragua 0 . . . . . . . . . . .

55 Thailand 17.0 1975-76 5.6 9.6 13.9 21.1 49.8 34.156 El Salvador . . 1976-77 5.5 10.0 14.8 22.4 47.3 29.557 Congo, People's Rep. 16.4 .

58 Jamaica59 Guatemala60 Cameroon 14.061 Paraguay62 Ecuador

63 Botswana 16.1 .

64 Tunisia 19.8 . . . . . . . . . . . . .

65 Turkey 21.8 1973 3.5 8.0 12.5 19.5 56.5 40.766 Colombia67 Chile 0

High-income economiesOECD members

tOther

Nonreporting nonmembers

Low- and middle-incomeSub-Saharan AfricaEast AsiaSouth AsiaEurope, M.East, & N.AfricaLatin America & Caribbean

17 highly indebted

Total reporting economiesOil exporters

Note: ICP refers to the UN's International Comparison Program. Data are preliminary Phase V results; see the technical notes for details. All estimates in thistable shouldbe treated with caution.

223

96 Spain 46.0 1980-81 6.9 12.5 17.3 23.2 40.0 24.597 Ireland 40.9 1973 7.2 13.1 16.6 23.7 39.4 25.198 tSaudi Arabia . . . . . . . . . . .

99 tlsrael . . 1979-80 6.0 12.0 17.7 24.4 39.9 22.6100 New Zealand 60.9 1981-82 5.1 10.8 16.2 23.2 44.7 28.7

101 tSingapore . . . . . . . . . . . . .102 tHongKong 60.4 1980 5.4 10.8 15.2 21.6 47.0 31.3103 Italy 65.6 1977 6.2 11.3 15.9 22.7 43.9 28.1104 UnitedKingdom 66.1 1979 7.0 11.5 17.0 24.8 39.7 23.4105 Australia 71.1 1975-76 5.4 10.0 15.0 22.5 47.1 30.5

106 Belgium 64.7 1978-79 7.9 13.7 18.6 23.8 36.0 21.5107 Netherlands 68.2 1981 8.3 14.1 18.2 23.2 36.2 21.5108 Austria 66.1 . . . . . . . .

109 France 69.3 1975 5.5 11.5 17.1 23.7 42.2 26.4110 Geimany, Fed. Rep. 73.8 1978 7.9 12.5 17.0 23.1 39.5 24.0

Ill Finland 69.5 1981 6.3 12.1 18.4 25.5 37.6 21.7112 IKuwait . . . . . . . . . . . .

113 Denmark 74.2 1981 5.4 12.0 18.4 25.6 38.6 22.3114 Canada 92.5 1981 5.3 11.8 18.0 24.9 40 23.8115 Sweden 76.9 1981 7.4 13.1 16.8 21.0 41.7 28.1

116 Japan 71.5 1979 8.7 13.2 17.5 23.1 37.5 22.4117 fUnited Arab Emirates . . . . . . . . . . . .118 Norway 84.4 1982 6.0 12.9 18.3 24.6 38.2 22.8119 United States 100.0 1980 5.3 11.9 17.9 25.0 39.9 23.3120 Switzerland 1978 6.6 13.5 18.5 23.4 38.0 23.7

icp estimates ofGDP per capita, 1985

(US 100)

Percentage share ofhousehold income, by percentile groups of householdc

YearLowest

20 percentSecondquintile

Thirdquintile

Fourthquintile

Highest20 percent

Highest10 percent

68 Pent 1972 1.9 5.1 11.0 21.0 61.0 42.969 Mauritius 24.8 1980-81 4.0 7.5 11.0 17.0 60.5 46.770 Jordan71 Costa Rica 1971 3.3 8.7 13.3 19.8 54.8 39.572 Syrian Arab Rep.

73 Malaysia 1973 3.5 7.7 12.4 20.3 56.1 39.874 Mexico 1977 2.9 7.0 12.0 20.4 57.7 40.675 South Africa .

76 Poland 24.577 Lebanon .

Upper-middle-income

78 Brazil 1972 2.0 5.0 9.4 17.0 66.6 50.679 Uruguay80 Hungary

. ,

31.2. .

1982. .

6.9. .

13.6. .

19.2. .

24.5.

35.8 20.581 Panama 1973 2.0 5.2 11.0 20 61.8 44.282 Argentina 1970 4.4 9.7 14.1 21.5 50.3 35.2

83 Yugoslavia 29.2 1978 6.6 12.1 18.7 23.9 38.7 22.984 Algeria . . . . . . . . . . , . .85 Korea,Rep. 24.3 1976 5.7 11.2 15.4 22.4 45.3 27.586 Gabon . . . . . . . . . . .

87 Portugal 33.8 1973-74 5.2 10.0 14.4 21.3 49.1 33.4

88 Venezuela . . 1970 3.0 7.3 12.9 22.8 54.0 35.789 Greece 35.5 . . . . .

90 TrinidadandTobago 1975-76 4.2 9.1 13.9 22.8 50.0 31.891 Libya . . .

92 Oman

93 Iran, Islamic Rep. 28.394 Iraq95 Romania

Table 31. Urbanization

224

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified

Urban populationPercentage of urban population

Number ofcities of

over 500,000persons

As percentage Average annualof total growth rate

population (percent)In cities of over

In largest city 500 000 persons

1965 1987 1965-80 1980-87 19(1) 1980 1960 1980 1960 1980

Low-income economies 17w 30w 3.5 w 8.8w 11 w 13w 30w 43w 59 t 165Chinaandlndia 18w 33w 3.0w 10.1w 6w 6w 36w 43w 49t 114tOther low-income 14w 24w 4.8 w 5.6w 24w 29w 17w 43w lOt Sit

1 Ethiopia 8 12 4.9 4.6 30 37 0 37 0 1

2 Bhutan 3 5 3.9 4.9 . . 0 0 0 03 Chad 9 30 7.8 7.8 . . 39 0 0 0 04 Zaire 26 38 4.5 4.6 14 28 14 38 1 25 Bangladesh 6 13 6.4 5.8 20 30 20 51 1 3

6 Malawi 5 13 7.5 8.6 . . 19 0 0 0 07 Nepal 4 9 6.4 7.8 41 27 0 0 0 08 LaoPDR 8 17 5.2 6.1 69 48 0 0 0 09 Mozambique 5 23 9.4 10.7 75 83 0 83 0 1

10 Tanzania 5 29 10.8 11.3 34 50 0 50 0 1

11 BurkinaFaso 5 8 4.1 5.3 . . 41 0 0 0 012 Madagascar 12 23 5.4 6.4 44 36 0 36 0 1

13 Mali 13 19 4.3 3.4 32 24 0 0 0 014 Bunindi 2 7 6.0 9.2 . . 0 0 0 015 Zambia 23 53 7.2 6.6 . . 35 0 35 0 1

16 Niger 7 18 7.0 7.5 . . 31 0 0 0 017 Uganda 7 10 5.0 5.0 38 52 0 52 0 1

18 China 18 38 2.3 11.0 6 6 42 45 38 7819 Somalia 20 36 5.5 5.5 34 0 0 0 020 Togo 11 24 6.6 6.9 60 0 0 0 0

21 India 19 27 3.9 4.1 7 6 26 39 11 3622 Rwanda 3 7 7.5 8.1 . . . . 0 0 0 023 SierraLeone 15 26 4.3 5.0 37 47 0 0 0 024 Benin II 39 9.0 7.9 . . 63 0 63 0 1

25 CentralAfricanRep. 27 45 4.3 4.7 40 36 0 0 0 0

26 Kenya 9 22 8.0 8.6 40 57 0 57 0 I

27 Sudan 13 21 5.7 4.2 30 31 0 31 0 1

28 Pakistan 24 31 4.3 4.5 20 21 33 51 2 729 Haiti 18 29 4.2 4.1 42 56 0 56 0 1

30 Lesotho 6 19 7.8 7.2 0 0 0 0

31 Nigeria 17 33 5.7 6.3 13 17 22 58 2 932 Ghana 26 32 3.2 4.1 25 35 0 48 0 233 SriLanka 20 21 2.3 1.2 28 16 0 16 0 1

34 Yemen,PDR 30 42 3.5 4.6 61 49 0 0 0 035 Mauritania 10 38 9.2 7.9 . . 39 0 0 0 0

36 Indonesia 16 27 4.8 5.0 20 23 34 50 3 937 Liberia 22 42 6.2 5.9 . . . . 0 0 0 038 Afghanistan 9 . . 6.0 . . 33 17 0 17 0 1

39 Burma 21 24 3.2 2.3 23 23 23 23 1 2

40 Guinea 12 24 5.3 5.7 37 80 0 80 0 1

41 Kampuchea,Dem. 11 . . -0.5 . . . . . . . . .

42 VietNam .. 21 . . 3,9 21 50 4

Middle-income economies 42 w 57 w 3.9w 3.4w 29w 31w 34w 47w Sit 112tLower-middle-income 39 w 51 w 3.8w 3.5w 31w 34w 32w 46w 29t 61t

43 Senegal 33 37 2.9 3.8 53 65 0 65 0 1

44 Bolivia 40 50 3.1 4.4 47 44 0 44 0 1

45 Zimbabwe 14 26 6.0 6.3 40 50 0 50 0 1

46 Philippines 32 41 4.2 3.8 27 30 27 34 1 247 YemenArabRep. 5 23 10.1 8.4 . . 25 0 0 0 0

48 Momcco 32 47 4.3 4.5 16 26 16 50 1 449 Egypt,ArabRep. 41 48 2.9 3.7 38 39 53 53 2 250 PapuaNewGuinea 5 15 8.1 4.8 . . 25 0 0 0 051 Dominican Rep. 35 58 5.2 4.4 50 54 0 54 0 1

52 Côted'Ivoire 23 44 7.5 6.9 27 34 0 34 0 1

53 Honduras 26 42 5.5 5.8 31 33 0 0 0 054 Nicaragua 43 58 4.7 4.7 41 47 0 47 0 1

55 Thailand 13 21 5.1 4.9 65 69 65 69 1

56 El Salvador 39 44 3.2 1.9 26 22 0 0 0 057 Congo, People's Rep. 34 41 3.4 4.6 77 56 0 0 0 0

58 Jamaica 38 51 2.9 2.6 77 66 0 66 0 1

59 Guatemala 34 33 2.7 2.9 41 36 41 36 1

60 Camemon 16 46 8.1 7.4 26 21 0 21 0 1

61 Paraguay 36 46 3.8 4.6 44 44 0 44 0 1

62 Ecuador 37 55 4.7 5.0 31 29 0 51 0 2

63 Botswana 4 21 12.4 8.1 . . . . . . . . . .

64 Tunisia 40 54 4.0 2.9 40 30 40 30 1 1

65 Turkey 34 47 4.2 3.4 18 24 32 42 3 466 Colombia 54 69 3.4 2.9 17 26 28 51 3 467 Chile 72 85 2.6 2.3 38 44 38 44 1 1

225

Urban populationPercentage of urban population

Number ofcities of

over 500,000persons

As percentage Average annualof iota! growth rate

population (percent)In cities of over

In largest city 500 0(X) persons

1965 1987 1965-80 1980-87 1960 1980 1960 1980 1960 1980

68 Pens 52 69 4.3 3.2 38 39 38 44 I 269 Mauritius 37 42 2.5 0.8 . . . . . . . .

70 Jonlan 46 66 4.4 5.3 31 37 0 37 0 1

71 CostaRica 38 45 4.0 1.8 67 64 0 64 0 1

72 SyrianArabRep. 40 51 4.6 4.5 35 33 35 55 1 2

73 Malaysia 26 40 4.5 5.0 19 27 0 27 0 1

74 Mexico 55 71 4.4 3.2 28 32 36 48 3 7

75 SouthAfrica 47 57 3.3 3.3 16 13 44 53 4 7

76 Poland 50 61 1.9 1.5 17 15 41 47 5 877 Lebanon 50 4.5 . . 64 79 64 79 1

Upper-middle-income 46w 66w 3.9w 3.2w 27w 27w 36w 49w 22t 511

78 Brazil 50 75 4,5 3,7 14 15 35 52 6 1479 Uruguay 81 85 0.6 0.7 56 52 56 52 1

80 Hungary 43 59 2.0 1.4 45 37 45 37 1 1

81 Panama 44 54 3.5 3.0 61 66 0 66 0 1

82 Argentina 76 85 2.2 1.9 46 45 54 60 3 5

83 Yugoslavia 31 48 3.0 2.6 11 10 11 23 1 384 Algeria 38 44 3.7 3.9 27 12 27 12 I

85 Korea,Rep. 32 69 5.8 4.2 35 41 61 77 3 786 Gabon 21 43 6.7 6.7 . . . . . . . . .

87 Portugal 24 32 1.9 1.6 47 44 47 44 1

88 Venezuela 70 83 4.8 2.6 26 26 26 44 1 489 Greece 48 61 2.0 1.4 51 57 51 70 1 290 Trinidadandlobago 30 67 5.7 3.9 . . . 0 0 0 091 Libya 26 67 9.8 7.0 57 64 0 64 0 1

92 Oman 4 10 7.4 8.8

93 Iran, IslamicRep. 37 53 5.2 4.2 26 28 26 47 I 694 Iraq 51 72 5.3 4.9 35 55 35 70 1 395 Romania 38 49 3.0 0.3 22 17 22 17 1

Low- and middle-income 24 w 37 w 3.7w 6.3 w 16w 18w 31 w 44w 1101 277 tSub-Saharan Africa 14 w 27 w 5.5 w 6.9 w 28 w 36 w 7w 41 w 3t 27 1

East Asia 19 w 37 w 3.1 w 11.0w 11 w 13 w 41 w 47 w 46 1 102 1

South Asia 18 w 25 w 4.0 w 4.1 w 11w 11 w 25 w 40 w 15 I 49 1

Europe, M.East, & N.Africa 37 w 50 w 3.5 w 3.2 w 28 w 28 w 31 w 40 w 22 t 43 tLatin America & Caribbean 53 w 70 w 3.9w 3.2w 27 w 29 w 32 w 49 w 20 t 49 r

17 highly indebted 44w 60w 4.0w 3.8w 23w 25w 29w 49w 241 62t

High-income economies 71 w 77 w 1.4 w 0.9 w 19 w 19 w 47 w 55 w 107 I 157 1OECD members 72 w 77 w 1.3 w 0.8 w 18 w 18 w 47 w 55 w 104 1 152 1

fOther 69w 83 w 4.6 w 3.6 w 58 w 49 w 51 w 54 w 31 5 t

96 Spain 61 77 2.2 1.4 13 17 37 44 5 697 Ireland 49 58 2.1 1.3 51 48 51 48 I

98 tSaudi Arabia 39 75 8.5 6.0 15 18 0 33 0 299 j'Israel 81 91 3.5 2.1 46 35 46 35 I

100 NewZealand 79 84 1.6 1.1 25 30 0 30 0 1

101 tSingapore 100 100 1.6 1.1 100 100 100 100 1

102 tHong Kong 89 93 2.1 1.7 100 100 100 100 1

103 Italy 62 68 1.1 0.6 13 17 46 52 7 9104 United Kingdom 87 92 0.5 0.3 24 20 61 55 15 17

105 Australia 83 86 2.0 1.3 26 24 62 68 4 5

106 Belgium 93 97 0.4 0.2 17 14 28 24 2 2

107 Netherlands 86 88 1.2 0.5 9 9 27 24 3 3108 Austria 51 57 0.8 0.6 51 39 51 39 1

109 France 67 74 1.2 0.6 25 23 34 34 4 6110 Gemsany,Fed. Rep. 79 86 0.7 0.1 20 18 48 45 11 II

111 Finland 44 60 2.3 0.5 28 27 0 27 0 1

112 tKuwait 78 95 8.3 5.2 75 30 0 0 0 0113 Denmark 77 86 1.1 0.3 40 32 40 32 1

114 Canada 73 76 1.5 1.1 14 18 31 62 2 9115 Sweden 77 84 0.9 0.2 15 15 15 35 I 3

116 Japan 67 77 2.1 0.8 18 22 35 42 5 9117 tUnited Arab Emirates 41 78 17.5 4.5 . . . . . . , . .

118 Norway 48 74 3.0 1.0 50 32 50 32 I

119 UnitedStates 72 74 1.2 1.0 13 12 61 77 40 65120 Switzerland 53 61 1.0 1.3 19 22 19 22 1

Total reporting economies 34 w 44w 2.7 w 4.5 w 17 w 18 w 35w 46w 2I7t 434tOil exporters 30 w 46 w 4.7 w 4.7 w 24 w 26w 31w 49w 161 501

Nonreportingnonmembers 52w 66w 2.2w 1.7w 9w 8w 20w 31 w 31! 591

Table 32. Women in development

226

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

Population:females per 100 males

Health and welfare

&lucation:females per 100 males

Life expectancyat birth (years)

Birthsattended byhealth staff (per

(percent)

Maternalmortality

100000live births)

Infantmortality(per 1,000live births)Total Age 0-4 Female Male Primary Secondary

1965 1985 1965 1985 1965 1987 1965 1987 1985 1980 1965 1987 1965 1986 1970 1986Low-income economies

Chinaandlndia96 w 96 w94w 94w

96 w 94 w94w 94w

49 w 62 w51w 65w

47 w 60 w48w 64w

124 w114w

76 w62w

75 w74w

60 w.. 60w

Other low-income 100 w 100w 99w 97w 45 w 55 w 43 w 53 w 149w 103 w 49w 75 w 45 w 59w1 Ethiopia 101 101 98 100 43 49 42 45 58 2,000b 166 154 38 63 32 642 Bhutan 98 94 95 94 40 47 41 49 3 173 128 54 313 Chad 104 103 100 100 38 47 35 44 700 184 132 39 9 184 Zaire 107 103 97 99 45 54 42 51 800b 142 98 48 75 26 405 Bangladesh 92 94 98 94 44 50 45 51 600 145 119 44 66 45

6 Malawi 108 104 105 98 40 48 38 44 59 250 201 150 78 39 517 Nepal 98 95 100 94 40 50 41 52 10 850 173 128 41 16 308 Lao PDR 98 99 98 98 50 47 110 59 81 34 739 Mozambique 104 103 100 100 39 50 36 47 28 479" 180 141 78 53

10 Tanzania 104 103 101 99 44 55 41 51 74 370b 139 106 60 100 38 62

11 BurkinaFaso 103 102 100 100 40 49 37 46 600 195 138 48 59 33 4712 Madagascar 103 102 102 99 44 55 41 52 62 300 203 120 83 70 7413 Mali 108 107 108 100 39 49 37 46 27 207 169 49 59 29 4314 Bunindi 108 105 103 99 45 51 42 47 12 143 112 42 75 17 5215 Zambia 102 103 98 98 46 55 42 51 110 123 80 78 90 49 5816 Niger 103 102 98 100 38 46 35 43 47 0b 181 135 46 56 35 3917 Uganda 102 102 100 99 47 50 43 47 300 122 103 82 31 5418 China 94 94 95 93 59 71 55 68 44 90 32 82 6919 Somalia 102 110 101 100 40 49 36 45 2 1,100 166 132 27 52 27 5820 Togo 104 103 100 99 43 55 40 51 15 476b 156 94 42 62 26 31

21 India 94 93 94 94 44 58 46 58 33 500 151 99 57 64 40 4822 Rwanda 103 102 101 100 51 50 47 47 . 210 141 122 69 97 44 2923 SierraLeone 104 104 101 100 34 42 31 40 25 450 210 151 55 4024 Benin 104 104 104 100 43 52 41 49 34 1,680" 168 116 44 50 44 4125 CentralAfrican Rep. 109 106 105 100 41 52 40 48 600 169 132 34 62 20 3926 Kenya 100 100 99 98 49 60 45 56 . 510" 113 72 57 93 42 6227 Sudan 100 99 98 97 41 51 39 49 20 607" 161 108 55 68 40 7628 Pakistan 93 91 96 95 44 54 47 55 24 600 150 109 31 50 25 3829 Haiti 105 104 98 98 46 56 44 53 20 340 180 117 . . 87 . . 8830 Lesotho 111 108 102 102 50 57 47 54 28 143 100 157 125 111 15031 Nigeria 103 102 100 99 43 53 40 49 . . 1,500 179 105 63 79 5132 Ghana 102 102 100 99 49 56 46 52 73 1070b 121 90 71 77 36 6233 SriLanka 93 98 97 96 64 73 63 68 87 90 63 33 86 93 101 10934 Yemen,PDR 98 103 97 97 40 52 39 49 10 100 197 120 . . 36 25 4835 Mauritania 103 103 101 100 39 48 35 44 23 119 180 127 31 66 13 41

36 Indonesia 102 101 101 97 45 62 43 58 43 800 129 71 . 93 64 7337 Liberia 99 97 100 99 45 56 42 53 173 139 87 3038 Afghanistan 95 . . 96 . . 35 . . 35 . . . . 640 207 . 17 50 16 4939 Burma 100 101 98 97 49 62 46 58 140 125 70 6540 Guinea 101 102 101 100 36 44 34 41 . . 197 147 . 44 30 33

41 Kampuchea 100 . . 98 . . 46 . . 43 . . . S . . 135 . . 56 . . .

42 VietNam . . 105 . . 97 . . 68 64 100 110 . . 46 . . 91 . . 90Middle-income economies 100 w 100 w 97 w 96 w 59 w 67 w 55 w 62 w 99 w 56 w 78 w 88 w 88 w 96 w

Lower-middle-income 100 w 100w 97 w 96 w 57 w 66 w 53 w 61 w 108 w 61 w 76 w 88 w 83 w 99w43 Senegal 102 102 101 100 42 49 40 46 . . 530 172 128 57 68 39 5044 Bolivia 102 103 99 98 46 55 42 51 36 480 161 110 68 88 64 8645 Zimbabwe 101 102 100 100 49 60 46 56 69 150" 104 72 . . 95 63 6846 Philippines 99 99 97 95 57 65 54 62 . . 80 73 45 94 94 . . 9947 YemenArabRep. 97 111 97 97 40 52 39 50 12 . . 197 116 5 27 3 12

48 Monicco 100 100 98 96 51 63 48 59 327b 147 82 42 62 40 6749 Egypt, Arab Rep. 98 97 95 95 50 62 47 59 24 500 173 85 64 77 4550 PapuaNewGuinea 91 92 94 95 44 55 44 53 34 1,000 143 62 61 . . .

51 Dominican Rep. 97 97 97 97 57 68 54 64 57 56 III 65 . . 96 . . 12252 Côted'Ivoire 100 97 100 99 43 54 40 SI 20 150 96 51 70 27 41

53 Honduras 99 98 97 96 51 66 48 62 50 82 130 69 . . 100 .

54 Nicaragua 101 100 98 96 51 65 49 62 . . 65 123 62 99 107 . . 17255 Thailand 100 99 96 96 58 66 53 63 33 270 90 39 89 . . 6956 ElSalvador 99 103 97 96 56 67 52 58 35 74 122 59 91 99 77 9457 Congo,PeoplesRep. 104 103 101 99 51 61 48 57 121 73 71 90 43 75

58 Jamaica 109 102 100 97 67 77 63 71 89 100 50 18 . . 97 111 10559 Guatemala 97 98 97 96 50 64 48 60 19 110 114 59 80 82 8260 Cameroon 105 103 100 99 47 58 44 54 . . 303 145 94 66 84 36 6261 Paraguay 100 98 96 96 67 69 63 65 22 469 74 42 88 92 91 9862 Ecuador 100 99 97 97 57 68 54 63 27 220 113 63 91 97 76 100

63 Botswana 122 110 103 100 49 62 46 56 52 300 113 67 129 108 . . Ill64 Tunisia 96 98 96 95 51 66 50 65 60 l,000c 147 59 52 80 44 7165 Turkey 96 94 97 97 55 66 52 63 78 207 165 76 66 89 37 5966 Colombia 101 99 97 97 59 68 53 64 51 130 99 46 102 100 95 10067 Chile 102 103 98 97 62 75 56 68 55 103 20 96 95 130 108

Total reporting economies 99 w 98 w 96 w 95 w 56 w 66 w 53 w 63 w 98 w 60 w . . 80 w . . 73 wOil exporters 101 w 99w 98w 97 w 50 w 62 w 48 w 58 w 134 w 75 w . . 87w 56w 77 w

Nonreportingnonmembers 116w 111w 96w 96w 72w 73w 64w 65w 33w 27wa. See the technical notes. b. Data refer to maternal mortality in hospitals and other medical institutionsonly. c. Community data from rural areas only.

227

96 Spain 106 104 96 94 74 80 68 74 96 10 38 10 93 94 . . 10297 Ireland 99 99 96 94 73 76 69 71 . . 7 25 7 . . 95 . . 10198 tSaudi Arabia 96 84 97 97 49 65 47 62 78 52 150 71 29 80 16 7099 tlsrael 98 100 95 94 73 77 70 74 99 5 27 12 . . 97 133 122

100 New Zealand 99 102 95 95 74 78 68 72 99 14 20 11 94 95 . . 98

101 tSingapore 94 96 95 93 68 76 63 70 100 11 26 9 85 89 103 102102 tHongKong 97 95 95 92 71 79 64 73 4 28 8 . 91 74 105103 Italy 104 106 95 95 73 80 68 74 . 13 36 10 93 95 86 95104 United Kingdom 106 105 95 95 74 78 68 72 98 7 20 9 .

105 Australia 98 100 95 95 74 80 68 73 99 11 19 10 95 94 . . 98

106 Belgium 104 105 95 95 74 78 68 72 100 10 24 10 94 96 . . 96107 Netherlands 100 102 95 96 76 80 71 74 5 14 8 95 98 91 112108 Austria 114 110 96 94 73 78 66 71 11 28 10 95 94 95 93109 France 105 105 96 95 75 80 68 74 . . 13 22 8 95 94 . . 110110 Germany,Fed.Rep. 111 109 95 95 73 78 67 72 11 24 8 94 96 92 98

Ill Finland 107 107 96 96 73 79 66 72 . . 5 17 7 . . 95 . . 113112 tKuwait 64 76 97 98 64 75 61 71 99 18 66 19 76 95 73 89113 Denmark 102 103 95 96 75 78 71 73 . . 4 19 8 96 96 102 105114 Canada 99 102 95 94 75 80 69 73 99 2 24 8 94 93 95 95115 Sweden 100 102 95 95 76 80 72 73 100 4 13 6 96 95 . . 107

116 Japan 104 103 96 95 73 81 68 75 100 15 18 6 96 95 101 99117 tUnited Arab Emirates 72 46 96 96 59 73 55 69 96 . . 108 26 . . 94 52 97118 Norway 101 102 95 95 76 80 71 74 100 4 17 8 . . 96 97 103119 United States 103 105 96 95 74 79 67 72 100 9 25 10 . . 94 . . 97120 Switzerland 105 105 96 95 75 80 69 74 5 18 7 . . 97 . . 99

Population:females per 100 males

Health and welfare

&Jucation.females per 100 males

Life expectancyat birth (years)

Birthsattended byhealth staff (per(percent)

Maternalmortality

100,000live births)

Infantmortality(per 1,000live births)Total Age 0-4 Female Male Primary Secondary

1965 1985 1965 1985 1965 1987 1965 1987 1985 1980 1965 1987 1965 1986 1970 1986

68 Peni 98 98 97 96 52 63 49 60 55 310 131 88 82 93 74 8869 Mauritius 100 102 96 97 63 70 59 63 90 99 64 23 90 97 66 9070 Jordan 94 94 96 96 51 68 49 64 75 114 44 72 91 53 9671 CostaRica 98 98 97 96 66 76 63 71 93 26 72 18 94 111 10672 SyrianArab Rep. 95 97 94 97 54 67 51 63 37 280 116 48 47 86 36 69

73 Malaysia 97 99 96 95 59 72 56 68 82 59 57 24 94 9874 Mexico 100 100 96 96 61 72 58 65 92 82 47 95 8875 SouthAfrica 100 101 96 98 53 64 49 58 55Qc 125 7276 Poland 106 105 95 95 72 76 66 68 12 42 18 . 94 251 26577 Lebanon 99 . 96 . . 64 . . 60 . 57 . . 77

Upper-middle-income 101 w 100 w 96 w 96 w 61 w 69 w 58 w 64 w 88 w 50 w 82 w 92 w

78 Bmzil 100 100 98 98 59 68 55 62 73 150 105 63 . . 9979 Umguay 100 103 96 97 72 74 64 68 . . 56 48 27 . . 95 12980 Hungary 107 107 94 96 72 74 67 67 99 28 39 17 94 95 202 18781 Panama 96 96 96 96 64 74 62 70 83 90 58 23 93 92 102 10982 Argentina 98 102 97 97 69 74 63 67 85 58 32 97 156

83 Yugoslavia 104 102 95 94 68 75 64 68 27 72 25 91 93 86 9284 Algeria 99 101 97 95 51 64 49 61 . 129 155 74 62 79 40 7285 Korea, Rep. 100 100 93 93 58 73 55 66 65 34 64 25 91 94 65 8886 Gabon 104 104 100 100 44 54 41 51 . 124" 155 103 84 99 43 8187 Portugal 110 107 95 94 69 77 63 70 15 65 16 95 91 98 116

88 Venezuela 97 98 96 96 64 73 60 67 82 65 67 36 98 96 102 11989 Greece 106 103 94 93 72 79 69 74 . . 12 34 13 92 94 91 10290 Trinidadandlobago 101 100 97 97 67 73 63 67 90 81 43 20 97 99 113 10191 Libya 93 90 97 96 51 63 48 59 76 80 140 82 39 . . 2192 Oman 98 89 97 97 44 57 42 54 60 197 100 . . 82 38 58

93 Iran, Islamic Rep. 99 97 99 94 52 64 52 62 . . 154 65 46 78 49 6794 Iraq 97 96 96 95 52 65 51 63 50 . . 121 69 42 81 41 5995 Ronsania 104 103 95 95 70 73 66 68 180 44 25 94

Low- and middle-income 97 w 97 w 96 w 95 w 52 w 63 w 49 w 61 w 118w 71w 77w .. 67wSub-Saharan Africa 103 w 102 w 100 w 99 w 44 w 52 w 41 w 49 w 160 w 115 w 56 w 76 w 40 w 56 wEast Asia 96 w 96 w 95 w 94 w 54 w 69 w 50 w 66 w 93w 40w 85w .. 72wSouth Asia 94 w 94 w 95 w 94 w 45 w 57 w 46 w 57 w 147 w 102 w 54w 63 w 40w 47wEurope, M.East, & N.Africa 101 w 99w 96 w 95 w 59 w 66 w 56 w 62w 115w 65w 65w 80w 81w 97wLatin America & Caribbean 100 w 100 w 97 w 97 w 60 w 69 w 56 w 63 w 95w 56w .... 103w

17 highly indebted 100 w 100 w 98 w 97 w 57 w 65 w 53 w 60 w 107 w 64 w 80 w 88 w 87 w 92 w

High-income economies 104 w 104 w 96 w 95 w 74 w 79 w 67 w 73 w 25 w 10 w 94 w . . 99 wOECD members 104 w 105 w 96 w 95 w 74 w 79 w 68 w 73 w 24 w 9 w 95 w .. 99 w

tOther 95 w 87 w 96 w 95 w 63 w 72 w 59 w 65 w 72 w 38 w 88 w 68 w 92 w

/

228

Technical notes

This twelfth edition of the World Development In-dicators provides economic and social indicatorsfor selected periods or years in a form suitable forcomparing economies and groups of economies.

The main criterion of country classification isGNP per capita, and this edition introduces newcountry groupings. The main tables now includecountry data on 120 economies rather than the 129presented in the previous edition. Since onlysparse data are available for nonreporting non-member economies, these countries are not in-cluded in the main tables. Summary measures forthem are shown in the main tables where avail-able, and selected country data are presented inBox A.2 in the technical notes. Box A.1, Basic indi-cators for economies with populations of less than1 million, has been expanded to cover 55 econo-mies. See the definitions and data notes at the be-ginning of the main report for details of countrycomposition of the new groups and other relatedinformation.

The tables have been rearranged thematically, sothe table order has changed since the last edition.Note also that two tables have been modified: Ta-ble 17, OECD imports of manufactured goods: ori-gin and composition, and Table 30, Income distri-bution and ICP estimates of GDP. Table 17provides data on South-North and North-Northmanufactured trade, and Table 30 now includesInternational Comparison Program (ICP) estimates

/77

of GDP as a percentage of the United States' GDP.The table on labor force has been dropped in thisyear's edition because of the lack of new data. Thistable will be reinserted when the 1990 round ofcensus results has been tabulated and collected bythe International Labour Office (ILO).

This makes a total of 32 main tables in which thestatistics and measures have been chosen to give abroad perspective on development.

Considerable effort has been made to standard-ize the data; nevertheless, statistical methods, cov-erage, practices, and definitions differ widely. Inaddition, the statistical systems in many develop-ing economies are still weak, and this affects theavailability and reliability of the data. Moreover,intercountry and intertemporal comparisons al-ways involve complex technical problems, whichcannot be fully and unequivocally resolved. Thedata are drawn from sources thought to be mostauthoritative, but many of them are subject to con-siderable margins of error. Readers are urged totake these limitations into account in interpretingthe indicators, particularly when making compari-sons across economies.

To facilitate international comparisons, nationalaccounts constant price data series based on yearsother than 1980 have been partially rebased to the1980 base. This is accomplished by rescaling, whichmoves the year in which current and constantprice versions of the same time series have the

same value, without altering the trend of either.Components of GDP are individually rescaled andare summed up to provide GDP and its subaggre-gates. In this process, a rescaling deviation mayoccur between constant price gross domestic prod-uct by industrial origin and GDP by expenditure.Such rescaling deviations are absorbed under theheading private consumption, etc., on the assump-tion that GDP by industrial origin is a more reliableestimate than GDP by expenditure.

This approach takes into account the effects ofchanges in intersectoral relative prices between theoriginal and the new base period. Because privateconsumption is calculated as a residual, the na-tional accounting identities are maintained. Itdoes, however, involve incorporating in privateconsumption whatever statistical discrepanciesarise for expenditure in the rebasing process. Thevalue added in the services sector also includes astatistical discrepancy as reported by the originalsource.

The summary measures are calculated by simpleaddition when a variable is expressed in reason-ably comparable units of account. Indicators thatdo not seem naturally additive are usually com-bined by a price weighting scheme. It should beemphasized, however, that use of a single baseyear raises problems over a period encompassingprofound structural changes and significantchanges in relative prices, such as have occurredfrom 1965 to 1987.

The World Development Indicators, unlike theWorld Tables, does not present time series. For sum-mary measures that cover many years, it is impor-tant that the calculation is based on the same coun-try composition over time and across topics. TheWorld Development Indicators does so by permit-ting group measures to be compiled only if thecountry data available for a given year account forat least two-thirds of the full group, as defined bythe 1980 benchmarks. So long as that criterion ismet, uncurrent reporters (and those not providingample history) are, for years with missing data,assumed to behave like the sample of the groupthat does provide estimates. Readers should keepin mind that the purpose is to maintain an appro-priate relationship across topics, despite myriadproblems with country data, and that nothingmeaningful can be deduced about behavior at thecountry level by working back from group indica-tors. In addition, the weighting process may resultin discrepancies between summed subgroup fig-ures and overall totals. See the introduction to theWorld Tables for further details.

All growth rates shown are calculated from con-stant price series and, unless otherwise noted,have been computed using the least-squaresmethod. The least-squares growth rate, r, is esti-mated by fitting a least-squares linear regressiontrend line to the logarithmic annual values of thevariable in the relevant period. More specifically,the regression equation takes the form: log X = a+ bt + et, where this is equivalent to the logarith-mic transformation of the compound growth rateequation, X = X, (1 + r). In these equations, X isthe variable, t is time, and a = log X. and b = log (1+ r) are the parameters to be estimated; e is theerror term. If b* is the least-squares estimate of b,then the annual average growth rate, r, is obtainedas [antilog (b*)] 1, and multiplied by 100 to ex-press it in percentage terms.

Table 1. Basic indicators

Population estimates for mid-1987 are based on datafrom the Population Division of the United Na-tions (U.N.) or from World Bank sources. Theseare normally projections, usually based on datafrom the most recent population censuses or sur-veys, which, in some cases, are neither recent norvery accurate. Note that refugees not permanentlysettled in the country of asylum are generally con-sidered to be part of the population of their coun-try of origin.

The data on area are from the Food and Agricul-ture Organization (FAO). For basic indicators oneconomies with populations of less than 1 million,see the table in Box A.1. For selected indicators onnonreporting nonmember economies, see the tablein Box A.2.

Gross national product (GNP) measures the totaldomestic and foreign value added claimed by resi-dents and is calculated without making deductionsfor depreciation. It comprises GDP (defined in thenote for Table 2) plus net factor income fromabroad, which is the income residents receive fromabroad for factor services (labor and capital) lesssimilar payments made to nonresidents who con-tributed to the domestic economy.

GNP per capita figures in U.S. dollars are calcu-lated according to the World Bank Atlas method.The Bank recognizes that perfect cross-countrycomparability of GNP per capita estimates cannotbe achieved. Beyond the classic, strictly intracta-ble, index number problem, two obstacles stand inthe way of adequate comparability. One concernsthe GNP and population estimates themselves.There are differences in national accounting and

229

Box A.1. Basic indicators for countries with populations of less than 1 million

Note: Countries in italics are those for which 1987 GNP per capita cannot be calculated; figures in italics are for years other than those specified.a. See the technical note to Table 1. b. Less than 500 square kilometers. C. Population is more than 1 million. d. GNP per capita estimated tobe in the upper-middle-income range. e. GNP per capita estimated to be in the high-income range. f. GNP per capita estimated to be in thelower-middle-income range. g. GNP per capita estimated to be in the low-income range.

230

Population(thousands)mid-1987

Area(thousandsof square

kilometers)

GNP per capita'

Average annualrate of inflation'

(percent)

Lifeexpectancy

at birth(years)1987

Averageannual

growth rateDollars (percent)

1987 1965-87 1965-80 1980-87

1 Guinea-Bissau 922 36 160 -1.9 . . 39.2 392 Gambia, The 797 11 220 1.2 8.3 13.8 433 São Tome and Principe 115 1 280 -0.1 4.9 654 Maldives 196 b 300 1.9 4.7 595 Comoros 426 2 370 0.6 6.6 566 Guyana 797 215 390 -4.4 8.1 13.6 667 Solomon Islands 293 28 420 . . 6.8 668 Kiribati 66 1 480 5.7 5.7 539 CapeVerde 344 4 500 13.9 65

10 Western Samoa 166 3 550 11.2 6511 Swaziland 712 17 700 2.4 9.1 10.2 5512 Tongo 100 1 720 . . . . 8.1 6613 St. Vincent and the Grenadines 120 b 1,000 1.2 11.1 4.6 6914 Belize 176 23 1,240 1.9 7.4 1.1 6715 Grenada 100 b 1,340 . . 11.2 4.9 6916 St. Lucia 142 1 1,400 2.3 9.4 3.9 7017 Dominica 80 1 1,440 0.1 12.9 5.7 7418 Fiji 722 18 1,570 2.2 10.4 5.8 7019 St. Kitts and Nevis 44 b 1,700 3.3 9.3 5.2 6820 Suriname 420 163 2,270 1.8 . . 4.1 6721 AntiguaandBarbuda 83 b 2,540 0.6 9.1 6.1 7322 Seychelles 67 b 3,120 3.1 12.9 3.7 7023 Malta 345 b 4,190 7.6 3.5 1.8 7324 Cyprus 680 9 5,200 . . . . 6.8 7625 Barbados 254 b 5,350 2.4 11.2 6.1 7526 Puerto Rico' 3,343 9 5,530 . . . . 4.5 7527 Bahamas 240 14 10,280 0.9 6.4 6.3 7028 Qatar 332 11 12,430 . . 6929 Brunei 235 6 15,390 . . . . -4.4 7430 Iceland 246 103 16,600 3.4 26.9 41.3 7731 Luxembourg 371 3 18,550 4.2 6.7 5.5 7432 American Samoa 36 b d33 Aruba 60 b e . . .

34 Bahrain 445 1 e . -2.8 7135 Bermuda 56 b e 8.1 10.736 Channel Islands 136 . . e . . 7637 Djibouti 370 22 f . . 4738 Equatorial Guinea 389 28 g . . 4639 Faeroe Islands 47 1 e40 Fed. States of Micronesia 90 1

41 French Guiana . . 90 d 7.4 .

42 French Polynesia 179 4 e 7243 Gibraltar 30 b d44 Greenland 54 342 e .

45 Guadeloupe 337 2 d . . 8.7 73

46 Guam 128 1 d 7247 Isle of Man 63 . . e . . .

48 Marshall Islands . . . . f .

49 Macau 429 b d . . . . 7150 Martinique 329 1 d 9.2 74

51 Netherlands Antilles 190 1 e 6652 New Caledonia 158 19 e . . 6853 Reunion 566 3 d . . . . . . 7154 Vanuatu 150 15 g . . . . 4.6 6355 Virgin Islands (U.S.) 110 b e 1.9 6.0 4.5 73

demographic reporting systems, and in the cover-age and reliability of underlying statistical informa-tion between various countries. The other relatesto the conversion of GNP data, expressed in differ-ent national currencies, to a common denomina-tionconventionally the U.S. dollarto comparethem across countries.

Recognizing that these shortcomings affect thecomparability of the GNP per capita estimates, theWorld Bank has introduced several improvementsin the estimation procedures. Through its regularreview of member countries' national accounts,the Bank systematically evaluates the GNP esti-mates, focusing on the coverage and concepts em-ployed and, where appropriate, making adjust-ments to improve comparability. As part of thereview, Bank staff estimates of GNP (and some-times of population) may be developed for themost recent period. The Bank also systematicallyassesses the appropriateness of official exchangerates as conversion factors. An alternative conver-sion factor is used (and reported in the World Ta-bles) when the official exchange rate is judged todiverge by an exceptionally large margin from therate effectively applied to foreign transactions.This applies to only a small number of countries.

The Atlas conversion factor for any year is theaverage of the exchange rate for that year and theexchange rates for the two preceding years, afteradjusting them for differences in relative inflationbetween the country and the United States. Thisthree-year average smooths fluctuations in pricesand exchange rates for each country. The resultingGNP in U.S. dollars is divided by the midyearpopulation for the latest year to derive GNP percapita.

Some sixty low- and middle-income economieshave suffered declining real GNP per capita in con-stant prices. In addition, terms of trade changesaffect relative income levels as do currency fluctua-tions, which have been sharp during the decade.Hence the levels and ranking of GNP per capitaestimates have sometimes changed in ways notnecessarily related to the relative domestic growthperformance of the economies considered.

The following formulas describe the proceduresfor computing the conversion factor for year t:

I(Pt

Jp \ Ip,(e_2,,) = [e,_ 5jj i) + e,_, p,_1) + e,]

and for calculating GNP per capita in U.S. dollarsfor year t:

(Y) = (1', / N, ± et_2,,)

where

= current GNP (local currency) for year= GNP deflator for year= annual average exchange rate (local currency/U.S.

dollar) for yearN, = midyear population for year

= U.S. GNP deflator for year t.

Because of problems associated with the avail-ability of comparable data and the determinationof conversion factors, information on GNP percapita is not shown for nonreporting nonmarketeconomies.

The use of official exchange rates to convert na-tional currency figures to the U.S. dollar does notattempt to measure the relative domestic purchas-ing powers of currencies. The United Nations In-ternational Comparison Program (ICP) has devel-oped measures of real GDP on an internationallycomparable scale using purchasing power parities(PPPs) instead of exchange rates as conversion fac-tors; see Table 30 for the most recent ICP estimates.Information on the ICP has been published in fourstudies and in a number of other reports. The mostrecent study is Phase V. parts of which have al-ready been published by the European Communi-ties and the OECD.

The ICP has now covered more than 70 countriesin five phases, at five-year intervals. The Bank iscurrently reviewing the data and methodology un-derlying the latest estimates and will include anupdated comparison of ICP and Atlas numbers ina future edition of the Atlas or another statisticalpublication.

The ICP figures reported in Table 30 are prelimi-nary and may be revised. The United Nations andits regional economic commissions, as well asother international agencies, such as the EuropeanCommunities, the Organisation for Economic Co-operation and Development, and the World Bank,are working to improve the methodology and toextend annual purchasing power comparisons toall countries. However, exchange rates remain theonly generally available means of converting GNPfrom national currencies to U.S. dollars.

The average annual rate of inflation is measured bythe growth rate of the GDP implicit deflator foreach of the periods shown. The GDP deflator isfirst calculated by dividing, for each year of theperiod, the value of GDP at current values by thevalue of GDP at constant values, both in nationalcurrency. The least-squares method is then used tocalculate the growth rate of the GDP deflator forthe period. This measure of inflation, like anyother, has limitations. For some purposes, how-

231

Box A.2. Selected indicators for nonreporting nonmember economies

232

ever, it is used as an indicator of inflation because itis the most broadly based deflator, showing annualprice movements for all goods and services pro-duced in an economy.

Life expectancy at birth indicates the number ofyears a newborn infant would live if patterns ofmortality prevailing for all people at the time of itsbirth were to stay the same throughout its life.Data are from the U.N. Population Division, sup-plemented by World Bank estimates.

The summary measures for GNP per capita and lifeexpectancy in this table are weighted by popula-tion. Those for average annual rates of inflation areweighted by the 1980 share of country GDP valuedin current U.S. dollars.

Tables 2 and 3. Growth and structure ofproduction

Most of the definitions used are those of the U.N.System of National Accounts (SNA), series F, no. 2,revision 3. Estimates are obtained from nationalsources, sometimes reaching the World Bankthrough other international agencies but more of-ten collected by World Bank staff during missions.

World Bank staff review the quality of nationalaccounts data and in some instances, through mis-sion work or technical assistance, help adjust na-

Note: For data comparability and coverage, see the technical notes. Figures in italics are for years other than those specified.

tional series. Because of the sometimes limited ca-pabilities of statistical offices, strict internationalcomparability cannot be achieved, especially ineconomic activities that are difficult to measure,such as the informal sector or subsistence agricul-ture.

GDP measures the total for final use of output ofgoods and services produced by an economy, byresidents and nonresidents, regardless of the allo-cation to domestic and foreign claims. It is calcu-lated without making deductions for depreciation.While SNA envisages estimates of GDP by indus-trial origin to be at producer prices, many coun-tries still report such details at factor cost, whichdiffers from producer prices because of the treat-ment of certain commodity taxes at the sectorlevel. Overall, GDP at producer prices is equal toGDP at purchaser values, less import duties. Forindividual sectors, say agriculture, values at pro-ducer prices differ from purchaser values becauseof indirect taxes minus subsidies and, at least intheory, because purchaser prices include retail andwholesale service and transport costs. Interna-tional comparability of the estimates is affected bythe use of differing country practices in valuationsystems for reporting value added by productionsectors. As a partial solution, GDP estimates areshown at purchaser values if the components are

USSR

DemocraticPeople's

Republic ofKorea

GermanDemocraticRepublic Czechoslovakia Cuba

1965 1987 1965 1987 1965 1987 1965 1987 1965 1987

Population (millions) 232 283 12 21 17 17 14 16 8 10Urban population (percentage of total) 52 67 45 66 73 77 51 67 58 73Life expectancy at birth (years) 69 69 57 69 70 73 69 71 67 75Crude birth rate (per thousand) 18 19 39 29 17 14 16 14 34 17Crude death rate (per thousand) 7 10 12 5 14 13 10 12 8 6Population per physician 480 . . . . 420 870 440 540 280 1,150 530Total fertility rate 2.5 2.4 5.6 3.6 2.5 1.8 2.4 2 4.4 1.9Infant mortality per 1,000 live births 28 25 64 33 25 9 26 13 38 13Low birth weight (percent) . . 6 . . . . . 6 . 6 . . 8Dailycaloriesupply, percapita 3,205 3,399 2,329 3,232 3,204 3,814 3,383 3,448 2,374 3,124Food production index (1979-81 = 100) 85 112 72 110 73 114 73 119 82 108Education, primary (female) 103 . . . . 111 103 97 98 119 101Education, primary (total) 103 106 . . . . 109 103 99 97 121 105Area (thousands of square kilometers) . . 22,402 . . 121 108 128 111Population projected to year 2000

(millions) . 307 28 17 16 12

on this basis, and such instances are footnoted.However, for a few countries in Tables 2 and 3,GDP at purchaser values has been replaced byGDP at factor cost. Note that in editions before1986, GDP at producer prices and GDP at purchaservalues were referred to as GDP at factor cost andGDP at market prices, respectively.

The figures for GDP are dollar values convertedfrom domestic currencies using single-year officialexchange rates. For a few countries where the offi-cial exchange rate does not reflect the rate effec-tively applied to actual foreign exchange transac-tions, an alternative conversion factor is used (andreported in the World Tables). Note that this tabledoes not use the three-year averaging techniqueapplied for GNP per capita in Table 1.

Agriculture covers forestry, hunting, and fishing,as well as agriculture. In developing countries withhigh levels of subsistence farming, much of agri-cultural production is either not exchanged or notexchanged for money. This increases the difficultyof measuring the contribution of agriculture toGDP and reduces the reliability and comparabilityof such numbers. Industry comprises value addedin mining; manufacturing (also reported as a sub-group); construction; and electricity, water, andgas. Value added in all other branches of economicactivity, including imputed bank service charges,

import duties, and any statistical discrepanciesnoted by national compilers, are categorized asservices, etc.

Partially rebased 1980 series in domestic curren-cies, as explained above, are used to compute thegrowth rates in Table 2. The sectoral shares of GDPin Table 3 are based on current price series.

In calculating the summary measures for each indi-cator in Table 2, partially rebased constant 1980U.S. dollar values for each economy are calculatedfor each of the years of the periods covered; thevalues are often aggregated across countries foreach year; and the least-squares procedure is usedto compute the growth rates. The average sectoralpercentage shares in Table 3 are computed fromgroup aggregates of sectoral GDP in current U.S.dollars.

Table 4. Agriculture and food

The basic data for value added in agriculture are fromthe World Bank's national accounts series at cur-rent prices in national currencies. The value addedin current prices in national currencies is convertedto U.S. dollars by applying the single-year conver-sion procedure, as described in the technical notefor Tables 2 and 3.

The figures for the remainder of this table are

233

Angola Bulgaria Albania Mongolia Namibia

1965 1987 1965 1987 1965 1987 1965 1987 1965 1987

5 9 8 9 2 3 1 2 1 1 Population (millions)13 26 46 68 32 35 42 51 28 54 Urban population (percentage of total)35 45 69 72 66 72 57 64 45 56 Life expectancy at birth (years)49 47 15 13 35 27 42 39 46 45 Crude birth rate (per thousand)29 20 8 12 9 6 12 8 22 13 Crude death rate (per thousand)

13,150 17,780 600 280 2,100 . . 710 100 . Population per physician6.4 6.4 2.1 1.9 5.3 3.3 5.8 5.4 6.1 6.1 Total fertility rate193 137 31 15 87 39 90 45 146 106 Infant mortality per 1,000 live births

17 .. .. .. 7 .. 10 Low birth weight (percent)1,897 2,716 3,452 3,642 2,389 2,713 2,597 2,847 1,904 1,824 Daily calorie supply, per capita

126 87 78 104 85 95 138 101 114 88 Food production index (1979-81 = 100)26 . . 102 102 87 93 97 103 . Education, primary (female)39 93 103 103 92 96 98 102 . . Education, primary (total)

1,247 111 29 . . 1,565 . . 1,824 Area (thousands of square kilometers)Population projected to year 2000

13 . . 9 4 3 2 (millions)

from the Food and Agriculture Organization(FAQ).

Cereal imports are measured in grain equivalentsand defined as comprising all cereals in the Stan-dard International Trade Classification (SITC), revi-sion 2, groups 041-046. Food aid in cereals coverswheat and flour, bulgur, rice, coarse grains, andthe cereal component of blended foods. The fig-ures are not directly comparable since cereal im-ports are based on calendar-year data, whereasfood aid in cereals is based on data for crop yearsreported by donor countries and international or-ganizations, including the International WheatCouncil and the World Food Programme. Further-more, food aid information by donors may not cor-respond to actual receipts by beneficiaries during agiven period because of delays in transportationand recording, or because it is sometimes not re-ported to the FAQ or other relevant internationalorganizations. The earliest available food aid dataare for 1974. The time reference for food aid is thecrop year, July-June.

Fertilizer consumption measures the plant nutri-ents used in relation to arable land. Fertilizer prod-ucts cover nitrogenous phosphate, which includesground rock phosphate and potash fertilizers. Ara-ble land is defined as land under temporary crops(double-cropped areas are counted once), tempo-rary meadows for mowing or pastures, land undermarket or kitchen gardens, land temporarily fallowor lying idle, as well as land under permanentcrops. The time reference for fertilizer consump-tion is the crop year, July-June.

The index of food production per capita shows theaverage annual quantity of food produced per cap-ita in 1985-87 in relation to that produced in 1979-81. The estimates are derived by dividing thequantity of food production by the total popula-tion. For this index food is defined as comprisingnuts, pulses, fruits, cereals, vegetables, sugarcane, sugar beet, starchy roots, edible oils, live-stock, and livestock products. Quantities of foodproduction are measured net of animal feed, seedsfor use in agriculture, and food lost in processingand distribution.

The summary measures for fertilizer consumptionare weighted by total arable land area; the summarymeasures for food production per capita areweighted by population.

Table 5. Commercial energy

The data on energy are primarily from U.N.sources. They refer to commercial forms of pri-

234

mary energypetroleum and natural gas liquids,natural gas, solid fuels (coal, lignite, and so on),and primary electricity (nuclear, geothermal, andhydroelectric power)all converted into oil equiv-alents. Figures on liquid fuel consumption includepetroleum derivatives that have been consumed innonenergy uses. For converting primary electricityinto oil equivalents, a notional thermal efficiency of34 percent has been assumed. The use of firewood,dried animal excrement, and other traditional fu-els, although substantial in some developing coun-tries, is not taken into account because reliable andcomprehensive data are not available.

Energy imports refer to the dollar value of energyimportssection 3 in the SITC, revision 1and areexpressed as a percentage of earnings from mer-chandise exports.

Because data on energy imports do not permit adistinction between petroleum imports for fueland for use in the petrochemicals industry, thesepercentages may overestimate the dependence onimported energy.

The summary measures of energy production andconsumption are computed by aggregating the re-spective volumes for each of the years covered bythe periods and then applying the least-squaresgrowth rate procedure. For energy consumption percapita, population weights are used to computesummary measures for the specified years.

The summary measures of energy imports as a per-centage of merchandise exports are computed fromgroup aggregates for energy imports and merchan-dise exports in current dollars.

Table 6. Structure of manufacturing

The basic data for value added in manufacturing arefrom the World Bank's national accounts series atcurrent prices in national currencies. The figuresshown are dollar values converted from nationalcurrencies by using single-year official exchangerates. For a few countries where the official ex-change rate does not reflect the rate effectively ap-plied to actual foreign exchange transactions, analternative conversion factor is used.

The data for distribution of value added amongmanufacturing industries are provided by theUnited Nations Industrial Development Organiza-tion (UNIDO), and distribution calculations arefrom national currencies in current prices.

The classification of manufacturing industries isin accord with the U.N. International Standard In-dustrial Classification of All Economic Activities (ISIC).Food and agriculture comprise ISIC division 31; tex-

tiles and clothing, division 32; machinery and trans-port equipment, major groups 382-84; and chemicals,major groups 351 and 352. Other comprises woodand related products (division 33), paper and re-lated products (division 34), petroleum and relatedproducts (major groups 353-56), basic metals andmineral products (divisions 36 and 37), fabricatedmetal products and professional goods (majorgroups 381 and 385), and other industries (majorgroup 390). When data for textiles, machinery, orchemicals are shown as not available, they are alsoincluded in other.

Summary measures given for value added in man-ufacturing are totals calculated by the aggregationmethod noted in the front of the technical notes.

Table 7. Manufacturing earnings and output

Four indicators are showntwo relate to real earn-ings per employee, one to labor's share in totalvalue added generated, and one to labor produc-tivity in the manufacturing sector. The indicatorsare based on data from UNIDO, although the de-flators are from other sources, as explained below.

Earnings per employee are in constant prices andare derived by deflating nominal earnings per em-ployee, by the country's consumer price index(CPI). The CPI is from the IMF's International Fi-nancial Statistics (IFS). Total earnings as percentage ofvalue added are derived by dividing total earnings ofemployees by value added in current prices, toshow labor's share in income generated in themanufacturing sector. Gross out put per employee is inconstant prices and is presented as an index ofoverall labor productivity in manufacturing with1980 as the base year. To derive this indicator,UNIDO data on gross output per employee in cur-rent prices are adjusted using the implicit deflatorsfor value added in manufacturing or in industrytaken from the World Bank's national accountsdata files.

To improve cross-country comparability, UNIDOhas, where possible, standardized the coverage ofestablishments to those with 5 or more employees.

The concepts and definitions are in accordancewith the International Recommendations for IndustrialStatistics published by the United Nations. Earn-ings (wages and salaries) cover all remuneration toemployees paid by the employer during the year.The payments include (a) all regular and overtimecash payments and bonuses and cost of living al-lowances; (b) wages and salaries paid during vaca-tion and sick leave; (c) taxes and social insurancecontributions and the like, payable by the employ-

ees and deducted by the employer; and (d) pay-ments in kind.

The value of gross output is estimated on the basisof either production or shipments. On the produc-tion basis it consists of (a) the value of all productsof the establishment, (b) the value of industrialservices rendered to others, (c) the value of goodsshipped in the same condition as received, (d) thevalue of electricity sold, and (e) the net change inthe value of work-in-progress between the begin-ning and the end of the reference period. In thecase of estimates compiled on a shipment basis,the net change between the beginning and the endof the reference period in the value of stocks offinished goods is also included. Value added is de-fined as the current value of gross output less thecurrent cost of (a) materials, fuels, and other sup-plies consumed, (b) contract and commission workdone by others, (c) repair and maintenance workdone by others, and (d) goods shipped in the samecondition as received.

The term employees in this table combines twocategories defined by the U.N., regular employeesand persons engaged. Together these groups com-prise regular employees, working proprietors, ac-tive business partners, and unpaid family workers;they exclude homeworkers. The data refer to theaverage number of employees working during theyear.

Tables 8 and 9. Growth of consumption andinvestment; structure of demand

GDP is defined in the note for Table 2, but for thesetwo tables it is in purchaser values.

General government consumption includes all cur-rent expenditure for purchases of goods and ser-vices by all levels of government. Capital expendi-ture on national defense and security is regardedas consumption expenditure.

Private consumption, etc., is the market value of allgoods and services purchased or received as in-come in kind by households and nonprofit institu-tions. It excludes purchases of dwellings, but in-cludes imputed rent for owner-occupied dwellings(see Table 10 for details) In practice, it includesany statistical discrepancy in the use of resources.At constant prices, this means it also includes therescaling deviation from partial rebasing.

Gross domestic investment consists of outlays onadditions to the fixed assets of the economy, plusnet changes in the level of inventories.

Gross domestic savings are calculated by deductingtotal consumption from gross domestic product.

235

Exports of goods and nonfactor services represent thevalue of all goods and nonfactor services providedto the rest of the world; they include merchandise,freight, insurance, travel, and other nonfactorservices. The value of factor services, such as in-vestment income, interest, and labor income, isexcluded.

The resource balance is the difference between ex-ports of goods and nonfactor services and importsof goods and nonfactor services.

Partially rebased 1980 series in constant domesticcurrency units (see above) are used to compute theindicators in Table 8. Table 9 uses national accountsseries in current domestic currency units. Thegrowth rates in Table 8 are calculated from the con-stant 1980 price series; the shares of GDP in Table9, from current price series.

The summary measures are calculated by themethod explained in the note for Tables 2 and 3.

Table 10. Structure of consumption

Percentage shares of selected items in total house-hold consumption expenditure are computed fromSNA-defined details of GDP (expenditure at na-tional market prices), often as collected for Interna-tional Comparison Program (ICP) Phases IV (1980)and V (1985). For countries not covered by the ICP,less detailed national accounts estimates are in-cluded, where available. The intention is topresent a general idea of the broad structure ofconsumption. The data cover 83 countries (fivemore than last year's edition, including Bank staffestimates for China) and refer to the most recentestimates, generally for a year between 1980 and1985, inclusive. Where they refer to earlier years,the figures are shown in italics. Consumption hererefers to private (nongovernment) consumption asdefined in the SNA and in the notes to Tables 2, 4,and 9, except that education and medical care com-prise government as well as private outlays. ThisICP concept of "enhanced consumption" reflectswho uses rather than who pays for consumptiongoods, and improves international comparabilitybecause it is less sensitive to differing nationalpractices regarding the financing of health and ed-ucation services.

A major subitem of food is presented: cereals andtubers. The subitem comprises the main stapleproducts: rice, flour, bread, all other cereals andcereal preparations, potatoes, yams, and other tu-bers. For high-income OECD economies, however,this subitem does not include tubers. Gross rents,fuel and power consist of actual and imputed rents,and repair and maintenance charges, as well as the

236

subitem fuel and power (for heating, lighting, cook-ing, air conditioning, and so forth). Note that thisitem excludes energy used for transport (rarely re-ported to be more than 1 percent of total consump-tion in low- and middle-income economies). Asmentioned above, medical care and education in-clude government as well as private consumptionexpenditure. Transport and communication also in-cludes the purchase of motor cars, which are re-ported as a subitem. Other consumption, the resid-ual group, includes beverages and tobacco,nondurable household goods and household ser-vices, recreational services, and services suppliedby hotels and restaurants. It also includes the sepa-rately reported subitem, other consumer durables,comprising household appliances, furniture, floorcoverings, recreational equipment, and watchesand jewelry.

Estimating the structure of consumption is oneof the weakest aspects of national accounting inlow- and middle-income economies. The structureis estimated through household expenditure sur-veys and similar survey techniques. It thereforeshares any bias inherent in the sample frame orpopulation. For example, some countries limit sur-veys to urban areas or, even more narrowly, tocapital cities. This tends to produce exceptionallylow shares for food and high shares for transport andcommunication, gross rents, fuel and power, and otherconsumption, which includes meals purchased out-side the home. Controlled food prices and incom-plete national accounting for subsistence activitiesalso contribute to low food shares.

Table 11. Central governmentexpenditure

The data on central government finance in Tables11 and 12 are from the IMF Government FinanceStatistics Yearbook, 1988 and IMF data files. The ac-counts of each country are reported using the sys-tem of common definitions and classificationsfound in the IMF Manual on Government FinanceStatistics (1986).

For complete and authoritative explanations ofconcepts, definitions, and data sources, see theseIMF sources. The commentary that follows is in-tended mainly to place these data in the context ofthe broad range of indicators reported in this edi-tion.

The shares of total expenditure and revenue bycategory are calculated from series in national cur-rencies. Because of differences in coverage of avail-able data, the individual components of centralgovernment expenditure and current revenue

shown in these tables may not be strictly compara-ble across all economies.

Moreover, inadequate statistical coverage ofstate, provincial, and local governments dictatesthe use of central government data; this may seri-ously understate or distort the statistical portrayalof the allocation of resources for various purposes,especially in countries where lower levels of gov-ernment have considerable autonomy and are re-sponsible for many economic and social services.In addition, central government can mean either oftwo accounting concepts: consolidated or budgetary.For most countries, central government financedata have been consolidated into one overall ac-count, but for others only the budgetary centralgovernment accounts are available. Since all cen-tral government units are not included in thebudgetary accounts, the overall picture of centralgovernment activities is incomplete. Countries re-porting budgetary data are footnoted.

It must be emphasized that for these and otherreasons the data presented, especially those for ed-ucation and health, are not comparable acrosscountries. In many economies private health andeducation services are substantial; in others publicservices represent the major component of totalexpenditure but may be financed by lower levels ofgovernment. Caution should therefore be exer-cised in using the data for cross-country compari-sons.

Central government expenditure comprises the ex-penditure by all government offices, departments,establishments, and other bodies that are agenciesor instruments of the central authority of a coun-try. It includes both current and capital (develop-ment) expenditure.

Defense comprises all expenditure, whether bydefense or other departments, on the maintenanceof military forces, including the purchase of mili-tary supplies and equipment, construction, re-cruiting, and training. Also in this category areclosely related items such as military aid programs.

Education comprises expenditure on the provi-sion, management, inspection, and support of pre-primary, primary, and secondary schools; of uni-versities and colleges; and of vocational, technical,and other training institutions. Also included isexpenditure on the general administration and reg-ulation of the education system; on research intoits objectives, organization, administration, andmethods; and on such subsidiary services as trans-port, school meals, and school medical and dentalservices. Note that Table 10 provides an alternativemeasure of expenditure on education, private aswell as public, relative to household consumption.

Health covers public expenditure on hospitals,maternity and dental centers, and clinics with amajor medical component; on national health andmedical insurance schemes; and on family plan-fling and preventive care. Note that Table 10 pro-vides a more comprehensive measure of expendi-ture on medical care, private as well as public,relative to household consumption.

Housing and community amenities and social securityand welfare cover expenditure on housing, such asincome-related schemes; on provision and supportof housing and slum clearance activities; on com-munity development; and on sanitary services.They also cover compensation for loss of income tothe sick and temporarily disabled; payments to theelderly, the permanently disabled, and the unem-ployed; family, maternity, and child allowances;and the cost of welfare services, such as care of theaged, the disabled, and children. Many expendi-tures relevant to environmental defense, such aspollution abatement, water supply, sanitary affairsand refuse collection, are included indistinguish-ably in this category.

Economic services comprise expenditure associ-ated with the regulation, support, and more effi-cient operation of business; economic develop-ment; redress of regional imbalances; and creationof employment opportunities. Research, trade pro-motion, geological surveys, and inspection andregulation of particular industry groups are amongthe activities included.

Other covers items not included elsewhere; for afew economies it also includes amounts that couldnot be allocated to other components (or adjust-ments from accrual to cash accounts).

Total expenditure (as a percentage of GNP) is morenarrowly defined than the measure of general gov-ernment consumption (percentage of GDP) givenin Table 9, because it excludes consumption expen-diture by state and local governments. At the sametime, central government expenditure is morebroadly defined because it includes government'sgross domestic investment and transfer payments.

Overall surplus/deficit is defined as current andcapital revenue and grants received, less total ex-penditure and lending minus repayments.

Summary measures for the components of centralgovernment expenditure are computed fromgroup totals for expenditure components and cen-tral government expenditure in current dollars.Those for total expenditure as a percentage of GNPand for overall surpus/deficit as a percentage ofGNP are computed from group totals for the abovetotal expenditures and overall surplus/deficit incurrent dollars, and GNP in current dollars, re-

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spectively. Since 1987 data are not available formore than half the countries, by weighting, 1986data are used for the summary measures in Tables11 and 12.

Table 12. Central governmentcurrent revenue

Information on data sources and comparability isgiven in the note to Table 11. Current revenue bysource is expressed as a percentage of total currentrevenue, which is the sum of tax revenue and non-tax revenue and is calculated from national curren-cies.

Tax revenue comprises compulsory, unrequited,nonrepayable receipts for public purposes. It in-cludes interest collected on tax arrears and penal-ties collected on nonpayment or late payment oftaxes and is shown net of refunds and other correc-tive transactions. Taxes on income, profit, and capitalgain are taxes levied on the actual or presumptivenet income of individuals, on the profits of enter-prises, and on capital gains, whether realized onland sales, securities, or other assets. Social securitycontributions include employers' and employees'social security contributions, as well as those ofself-employed and unemployed persons. Domestictaxes on goods and services include general sales,turnover or value added taxes, selective excises ongoods, selective taxes on services, taxes on the useof goods or property, and profits of fiscal monopo-lies. Taxes on international trade and transactions in-clude import duties, export duties, profits of ex-port or import monopolies, exchange profits, andexchange taxes. Other taxes include employers'payroll or labor taxes, taxes on property, and taxesnot allocable to other categories. They may includenegative values that are adjustments, for instance,for taxes collected on behalf of state and local gov-ernments and not allocable to individual tax cate-gories.

Non tax revenue comprises receipts that are not acompulsory nonrepayable payment for public pur-poses, such as administrative fees or entrepreneur-ial income from government ownership of prop-erty. Proceeds of grants and borrowing, fundsarising from the repayment of previous lending bygovernments, incurrence of liabilities, and pro-ceeds from the sale of capital assets are not in-cluded.

Summary measures for the components of currentrevenue are computed from group totals for reve-nue components and total current revenue in cur-rent dollars; those for current revenue as a per-centage of GNP are computed from group totals

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for total current revenue and GNP in current dol-lars. Since 1987 data are not available for morethan half the countries, by weighting, 1986 dataare used for the summary measures for Tables 11and 12.

Table 13. Money and interest rates

The data on monetary holdings are based on theIMF's International Financial Statistics (IFS). Mone-tary holdings, broadly defined, comprise the mone-tary and quasi-monetary liabilities of a country'sfinancial institutions to residents other than thecentral government. For most countries, monetaryholdings are the sum of money (IFS line 34) andquasi-money (IFS line 35). Money comprises theeconomy's means of payment: currency outsidebanks and demand deposits. Quasi-money com-prises time and savings deposits and similar bankaccounts that the issuer will readily exchange formoney. Where nonmonetary financial institutionsare important issuers of quasi-monetary liabilities,these are also included in the measure of monetaryholdings.

The growth rates for monetary holdings are cal-culated from year-end figures, while the average ofthe year-end figures for the specified year and theprevious year is used for the ratio of monetaryholdings to GDP.

The nominal interest rates of banks, also from IFS,represent the rates paid by commercial or similarbanks to holders of their quasi-monetary liabilities(deposit rates) and charged by the banks on loansto prime customers (lending rate). They are, how-ever, of limited international comparability partlybecause coverage and definitions vary, and partlybecause countries differ in the scope available tobanks for adjusting interest rates to reflect marketconditions.

Since interest rates (and growth rates for mone-tary holdings) are expressed in nominal terms,much of the variation between countries stemsfrom differences in inflation. For easy reference,the Table 1 indicator of recent inflation is repeatedin this table.

Table 14. Growth of merchandise trade

The statistics on merchandise trade, Tables 14through 17, are primarily from the U.N. trade datasystem, which accords with the U.N. Yearbook ofInternational Trade Statisticsthat is, the data arebased on countries' customs returns. However,more recent statistics are often from secondarysources, notably the IMF, as indicated in footnoted

cases. World Bank estimates are also reported. Sec-ondary sources and World Bank estimates arebased on aggregated reports available before thedetailed reports submitted to the U.N. appear. Insome cases, these permit coverage adjustments forsignificant components of a country's foreign tradenot subject to regular customs reports. Such casesare identified in the country notes to the WorldTables. Values in these tables are in current U.S.dollars.

Merchandise exports and imports, with some excep-tions, cover international movements of goodsacross customs borders. Exports are valued f.o.b.(free on board) and imports, c.i.f. (cost, insurance,and freight), unless otherwise specified in the fore-going sources. These values are in current dollars;note that they do not include trade in services.

The growth rates of merchandise exports and importsare in constant terms and are calculated fromquantum indexes of exports and imports. Quan-tum indexes are obtained from the export or im-port value index as deflated by the correspondingprice index. To calculate these quantum indexes,the World Bank uses its own price indexes, whichare based on international prices for primary com-modities and unit value indexes for manufactures.These price indexes are country-specific and disag-gregated by broad commodity groups. This en-sures consistency between data for a group ofcountries and those for individual countries. Suchdata consistency will increase as the World Bankcontinues to improve its trade price indexes for anincreasing number of countries. These growthrates can differ from those derived from nationalpractices because national price indexes may usedifferent base years and weighting proceduresfrom those used by the World Bank.

The terms of trade, or the net barter terms oftrade, measure the relative movement of exportprices against that of import prices. Calculated asthe ratio of a country's index of average exportprices to its average import price index, this indica-tor shows changes over a base year in the level ofexport prices as a percentage of import prices. Theterms of trade index numbers are shown for 1985and 1987, where 1980 = 100. The price indexes arefrom the source cited above for the growth rates ofexports and imports.

The summary measures for the growth rates arecalculated by aggregating the 1980 constant U.S.dollar price series for each year and then applyingthe least-squares growth rate procedure for the pe-riods shown. Note again that these values do notinclude trade in services.

Tables 15 and 16. Structure of merchandise trade

The shares in these tables are derived from tradevalues in current dollars reported in the U.N. tradedata system and the U.N. Yearbook of InternationalTrade Statistics, supplemented by other secondarysources and World Bank estimates as explained inthe note to Table 14.

Merchandise exports and imports are defined in thenote to Table 14.

The categorization of exports and imports fol-lows the SITC, series M, no. 34, revision 1. Esti-mates from secondary sources also usually followthis definition.

In Table 16, fuels, minerals, and metals are the com-modities in SITC section 3 (mineral fuels and lubri-cants and related materials) divisions 27 and 28(minerals and crude fertilizers, and metalliferousores) and division 68 (nonferrous metals). Otherprimary commodities comprise SITC sections 0, 1, 2,and 4 (food and live animals, beverages and to-bacco, inedible crude materials, oils, fats, andwaxes) less divisions 27 and 28. Machinery andtransport equipment are the commodities in SITCsection 7. Other manufactures represent SITC sec-tions 5 through 9 less section 7 and division 68.Textiles and clothing, representing SITC divisions 65and 84 (textiles, yarns, fabrics, and clothing), areshown as a subgroup of other manufactures.

In Table 15, food commodities are those in SITCsections 0, 1, and 4 and division 22 (food and liveanimals, beverages, oils and fats, and oilseeds andnuts), less division 12 (tobacco). Fuels are the com-modities in SITC section 3 (mineral fuels, lubri-cants and related materials). Other primary commod-ities comprise SITC section 2 (crude materials,excluding fuels), less division 22 (oilseeds andnuts) plus divisions 12 (tobacco) and 68 (nonfer-rous metals). Machinery and transport equipment arethe commodities in SITC section 7. Other manufac-tures, calculated residually from the total value ofmanufactured imports, represent SITC sections 5through 9, less section 7 and division 68.

The summary measures in Table 15 are weightedby total merchandise imports of individual coun-tries in current dollars; those in Table 16, by totalmerchandise exports of individual countries in cur-rent dollars. (See the note to Table 14.)

Table 17. OECD imports of manufactured goods:origin and composition

The data is from the U.N., reported by high-income OECD countries, which are the OECDmembers excluding Greece, Portugal, and Turkey.

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The table reports the value of manufactured im-ports of high-income OECD countries by the econ-omy of origin, and the composition of such im-ports by major manufactured product groups.

It replaces an earlier one on the origin and desti-nation of manufactured exports, which was basedon exports reported by individual economies. Asthere was a lag of several years in reporting bymany developing economies, estimates based onvarious sources were used to fill the gaps. Untilthese estimates can be improved, this present ta-ble, based on up-to-date and consistent but lesscomprehensive data, is included instead. Manu-factured imports of the predominant markets fromindividual economies are the best available proxyof the magnitude and composition of the manufac-tured exports of these economies to all destina-tions taken together.

Manufactured goods are the commodities in SITC,revision 1, sections 5 through 9 (chemical and re-lated products, basic manufactures, manufacturedarticles, machinery and transport equipment, andother manufactured articles and goods not else-where classified) excluding division 68 (nonferrousmetals). This definition is somewhat broader thanthe one used to define exporters of manufactures.

The major manufactured product groups re-ported are defined as the following: textiles andclothing (SITC 65 and 84), chemicals (SITC 5), elec-trical machinery and electronics (SITC 72), trans-port equipment (SITC 73), and others, defined asthe residual.

Table 18. Balance of payments and reserves

The statistics for this table are mostly as reportedby the IMF but do include recent estimates byWorld Bank staff and, in rare instances, the Bank'sown coverage or classification adjustments to en-hance international comparability. Values in thistable are in current U.S. dollars.

The current account balance after official transfers isthe difference between exports of goods and ser-vices (factor and nonfactor) as well as inflows ofunrequited transfers (private and official), and im-ports of goods and services as well as unrequitedtransfers to the rest of the world.

The current account balance before official transfers isthe current account balance that treats net officialunrequited transfers as akin to official capitalmovements. The difference between the two bal-ance of payment measures is essentially foreignaid in the form of grants, technical assistance, andfood aid, which, for most developing countries,tends to make current account deficits smaller thanthe financing requirement.

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Net workers' remittances cover payments and re-ceipts of income by migrants who are employed orexpect to be employed for more than a year in theirnew economy, where they are considered resi-dents. These remittances are classified as privateunrequited transfers, and are included in the bal-ance of payments current account balance, whilethose derived from shorter-term stays are includedin services, as labor income. The distinction ac-cords with internationally agreed guidelines, butmany developing countries classify workers' re-mittances as a factor income receipt (and hence acomponent of GNP). The World Bank adheres tointernational guidelines in defining GNP and,therefore, may differ from national practices.

Net direct private investment is the net amount in-vested or reinvested by nonresidents in enter-prises in which they or other nonresidents exercisesignificant managerial control, including equitycapital, reinvested earnings, and other capital. Thenet figures are obtained by subtracting the value ofdirect investment abroad by residents of the re-porting country.

Gross international reserves comprise holdings ofmonetary gold, special drawing rights (SDRs), thereserve position of members in the IMF, and hold-ings of foreign exchange under the control of mon-etary authorities. The data on holdings of interna-tional reserves are from IMF data files. The goldcomponent of these reserves is valued throughoutat year-end (December 31) London prices: that is,$37.37 an ounce in 1970 and $484.10 an ounce in1987. The reserve levels for 1970 and 1987 refer tothe end of the year indicated and are in currentdollars at prevailing exchange rates. Because of dif-ferences in the definition of international reserves,in the valuation of gold, and in reserve manage-ment practices, the levels of reserve holdings pub-lished in national sources do not have strictly com-parable significance. Reserve holdings at the endof 1987 are also expressed in terms of the numberof months of imports of goods and services theycould pay for, with total imports level for 1987.

The summary measures are computed from groupaggregates for gross international reserves and to-tal imports of goods and services, in current dol-lars.

Table 19. Official development assistance fromOECD and OPEC members

Official development assistance (ODA) consists of netdisbursements of loans and grants made on con-cessional financial terms by official agencies of themembers of the Development Assistance Commit-tee (DAC) of the Organisation for Economic Co-

operation and Development (OECD) and membersof the Organization of Petroleum Exporting Coun-tries (OPEC), to promote economic developmentand welfare. While this definition aims at exclud-ing purely military assistance, the borderline issometimes blurred; the definition used by thecountry of origin usually prevails. ODA also in-cludes the value of technical cooperation and assis-tance. All data shown are supplied by the OECD,and all U.S. dollar values are converted at officialexchange rates.

Amounts shown are net disbursements to devel-oping countries and multilateral institutions. Thedisbursements to multilateral institutions are nowreported for all DAC members on the basis of thedate of issue of notes; some DAC members pre-viously reported on the basis of the date of en-cashment. Net bilateral flows to low-income economiesexclude unallocated bilateral flows and alldisbursements to multilateral institutions.

The nominal values shown in the summary forODA from high-income OECD countries wereconverted at 1980 prices using the dollar GDP de-flator. This deflator is based on price increases inOECD countries (excluding Greece, Portugal, andTurkey) measured in dollars. It takes into accountthe parity changes between the dollar and nationalcurrencies. For example, when the dollar depreci-ates, price changes measured in national curren-cies have to be adjusted upward by the amount ofthe depreciation to obtain price changes in dollars.

The table, in addition to showing totals forOPEC, shows totals for the Organization of ArabPetroleum Exporting Countries (OAPEC). The do-nor members of OAPEC are Algeria, Iraq, Kuwait,Libya, Qatar, Saudi Arabia, and United Arab Emir-ates. ODA data for OPEC and OAPEC are alsoobtained from the OECD.

Table 20. Official development assistance:receipts

Net disbursements of ODA from all sources consist ofloans and grants made on concessional financialterms by all bilateral official agencies and multilat-eral sources to promote economic developmentand welfare. They include the value of technicalcooperation and assistance. The disbursementsshown in this table are not strictly comparable withthose shown in Table 19 since the receipts are fromall sources; disbursements in Table 19 refer only tothose made by high-income members of the OECDand members of OPEC. Net disbursements equalgross disbursements less payments to the origina-tors of aid for amortization of past aid receipts. Net

disbursements of ODA are shown per capita andas a percentage of GNE

The summary measures of per capita ODA arecomputed from group aggregates for populationand for ODA. Summary measures for ODA as a per-centage of GNP are computed from group totalsfor ODA and for GNP in current U.S. dollars.

Table 21. Total external debt

The data on debt in this and successive tables arefrom the World Bank Debtor Reporting System,supplemented by World Bank estimates. That sys-tem is concerned solely with developing econo-mies and does not collect data on external debt forother groups of borrowers, nor from economiesthat are not members of the World Bank. The dol-lar figures on debt shown in Tables 21 through 25are in U.S. dollars converted at official exchangerates.

The data on debt include private nonguaranteeddebt reported by twenty-four developing countriesand complete or partial estimates for an additionaltwenty-five countries.

Public loans are external obligations of publicdebtors, including the national government, itsagencies, and autonomous public bodies. Publiclyguaranteed loans are external obligations of privatedebtors that are guaranteed for repayment by apublic entity. These two categories are aggregatedin the tables. Private nonguaranteed loans are exter-nal obligations of private debtors that are not guar-anteed for repayment by a public entity.

Use of IMF credit denotes repurchase obligationsto the IMF for all uses of IMF resources, excludingthose resulting from drawings in the reservetranche and on the IMF Trust Fund and the Struc-tural Adjustment Facility. It is shown for the end ofthe year specified. It comprises purchases out-standing under the credit tranches, including en-larged access resources, and all of the special facili-ties (the buffer stock, compensatory financing, andExtended Fund Facility). Trust Fund and StructuralAdjustment Facility loans are included individu-ally in the Debtor Reporting System and are thusshown within the total of public long-term debt.Use of IMF credit outstanding at year-end (a stock)is converted to U.S. dollars at the dollar-SDR ex-change rate in effect at year-end.

Short-term external debt is debt with an originalmaturity of one year or less. Available data permitno distinctions between public and private non-guaranteed short-term debt.

Total external debt is defined for the purpose ofthis report as the sum of public, publicly guaran-

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teed, and private nonguaranteed long-term debt,use of IMF credit, and short-term debt.

Table 22. Flow of public and private externalcapital

Data on disbursements and repayment of principal(amortization) are for public, publicly guaranteed,and private nonguaranteed long-term loans. Thenet flow estimates are disbursements less the repay-ment of principal.

Table 23. Total external public and private debtand debt service ratios

Total long-term debt data in this table cover publicand publicly guaranteed debt and private non-guaranteed debt. The ratio of debt service to ex-ports of goods and services is one of several con-ventional measures used to assess the ability toservice debt. The average ratios of debt service toGNP for the economy groups are weighted byGNP in current dollars. The average ratios of debtservice to exports of goods and services areweighted by exports of goods and services in cur-rent dollars.

Table 24. External public debt and debt serviceratios

External public debt outstanding and disbursed repre-sents public and publicly guaranteed loans drawnat year-end, net of repayments of principal andwrite-offs. For estimating external public debt as apercentage of GNP, the debt figures are convertedinto U.S. dollars from currencies of repayment atend-of-year official exchange rates. GNP is con-verted from national currencies to U.S. dollars byapplying the conversion procedure described inthe technical note to Tables 2 and 3.

Interest payments are actual payments made onthe outstanding and disbursed public and publiclyguaranteed debt in foreign currencies, goods, orservices; they include commitment charges on Un-disbursed debt if information on those charges isavailable.

Debt service is the sum of actual repayments ofprincipal (amortization) and actual payments of in-terest made in foreign currencies, goods, or ser-vices on external public and publicly guaranteeddebt. Procedures for estimating total long-termdebt as a percentage of GNP, average ratios of debtservice to GNP, and average ratios of debt serviceto exports of goods and services are the same asthose described in the note to Table 23.

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The summary measures are computed from groupaggregates of debt service and GNP in current dol-lars.

Table 25. Terms of external public borrowing

Commitments refer to the public and publiclyguaranteed loans for which contracts were signedin the year specified. They are reported in curren-cies of repayment and converted into U.S. dollarsat average annual official exchange rates.

Figures for interest rates, maturities, and grace pe-riods are averages weighted by the amounts of theloans. Interest is the major charge levied on a loanand is usually computed on the amount of princi-pal drawn and outstanding. The maturity of a loanis the interval between the agreement date, when aloan agreement is signed or bonds are issued, andthe date of final repayment of principal. The graceperiod is the interval between the agreement dateand the date of the first repayment of principal.

Public loans with variable interest rates, as a percent-age of public debt, refer to interest rates that floatwith movements in a key market rate; for example,the London interbank offered rate (LIBOR) or theU.S. prime rate. This column shows the borrow-er's exposure to changes in international interestrates.

The summary measures in this table are weightedby the amounts of the loans.

Table 26. Population growthand projections

Population growth rates are period averages calcu-lated from midyear populations.

Population estimates for mid-1987 are based on of-ficial estimates made by country statistical offices,the U.N. Population Division, and the WorldBank. They take into account the results of recentpopulation censuses, which, in some cases, areneither recent nor accurate. Note that refugees notpermanently settled in the country of asylum aregenerally considered to be part of the populationof their country of origin.

The projections of population for 2000, 2025, andthe year in which the population will eventuallybecome stationary (see definition below) are madefor each economy separately. Information on totalpopulation by age and sex, fertility, mortality, andinternational migration is projected on the basis ofgeneralized assumptions until the population be-comes stationary. The base-year estimates are fromupdated printouts of the U.N. World PopulationProspects: 1988, recent issues of the U.N. Population

and Vital Statistics Report, World Bank country data,and national censuses and surveys.

The net reproduction rate (NRR), which measuresthe number of daughters a newborn girl will bearduring her lifetime, assuming fixed age-specificfertility and mortality rates, reflects the extent towhich a cohort of newborn girls will reproducethemselves. An NRR of 1 indicates that fertility isat replacement level: at this rate women will bear,on average, only enough daughters to replacethemselves in the population.

A stationary population is one in which age- andsex-specific mortality rates have not changed overa long period, while age-specific fertility rates havesimultaneously remained at replacement level(NRR = 1). In such a population, the birth rate isconstant and equal to the death rate, the age struc-ture is constant, and the growth rate is zero.

Population momentum is the tendency for popula-tion growth to continue beyond the time thatreplacement-level fertility has been achieved; thatis, even after the NRR has reached 1. The momen-tum of a population in any given year is measuredas a ratio of the ultimate stationary population tothe population of that year, given the assumptionthat fertility drops to replacement level by thatyear and remains there. For example, the 1990population of India is projected to be 848 million. Ifthe NRR were to drop to 1 by 1990, the projectedstationary population would be 1,448 millionreached in the middle of the twenty-secondcenturyand the population momentum would be1.7.

A population tends to grow even after fertilityhas declined to replacement level because pasthigh growth rates will have produced an age distri-bution with a relatively high proportion of womenin, or still to enter, the reproductive ages. Conse-quently, the birth rate will remain higher than thedeath rate, and the growth rate will remain posi-tive for several decades.

Population projections are made component bycomponent. Mortality, fertility, and migration areprojected separately and the results are applied it-eratively to the 1985 base year age structure. Forthe projection period 1985 to 2005, the changes inmortality are country specific: increments in lifeexpectancy and decrements in infant mortality arebased on previous trends for each country. Whenfemale secondary school enrollment is high, mor-tality is assumed to decline more quickly. Infantmortality is projected separately from adult mortal-ity.

Projected fertility rates are also based on pre-vious trends. For countries in which fertility has

started to decline (fertility transition), this trend isassumed to continue. It has been observed that nocountry with a life expectancy of less than 50 yearsexperienced a fertility decline; for these countriesthe average decline of the group of countries infertility transition is applied. Countries withbelow-replacement fertility are assumed to haveconstant total fertility rates until 1995-2000 andthen to regain replacement level by 2030.

International migration rates are based on pastand present trends in migration flows and migra-tion policy. Among the sources consulted are esti-mates and projections made by national statisticaloffices, international agencies, and research insti-tutions. Because of the uncertainty of future migra-tion trends, it is assumed in the projections thatnet migration rates will reach zero by 2025.

The estimates of the size of the stationary popu-lation and the assumed year of reachingreplacement-level fertility are speculative. Theyshould not be regarded as predictions. They are in-cluded to show the implications of recent fertilityand mortality trends on the basis of generalizedassumptions. A fuller description of the methodsand assumptions used to calculate the estimateswill be available from the World Bank's forthcom-ing World Population Projections, 1989-90 edition.

Table 27. Demography and fertility

The crude birth and death rates indicate respectivelythe number of live births and deaths occurring perthousand population in a year. They come fromthe sources mentioned in the note to Table 26.

The percentage of women of childbearing age pro-vides a more complete picture of fertility patterns.Comparison of 1965 and 1987 data adds an inter-esting aspect to the pattern of reproduction duringthe past two decades. Childbearing age is generallydefined as 15 to 49.

The total fertility rate represents the number ofchildren that would be born to a woman if shewere to live to the end of her childbearing yearsand bear children at each age in accordance withprevailing age-specific fertility rates. The ratesgiven are from the sources mentioned in Table 26.

The percentage of married women of childbearing ageusing contraception refers to women who are prac-ticing, or whose husbands are practicing, any formof contraception. Contraceptive usage is generallymeasured for women age 15-49. A few countriesuse measures relating to other age groups such as15 to 44, 18 to 44, and 19 to 49.

Data are mainly derived from the World FertilitySurveys, the Contraceptive Prevalence Surveys,

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the Demographic and Health Surveys, World Bankcountry data, and the U.N. publication Recent Lev-els and Trends of Contraceptive Use as Assessed in 1983.For a few countries for which no survey data areavailable, program statistics are used; these in-clude Bangladesh, India, and several African coun-tries. Program statistics may understate contracep-tive prevalence because they do not measure useof methods such as rhythm, withdrawal, or absti-nence, or contraceptives not obtained through theofficial family planning program. The data refer torates prevailing in a variety of years, generally notmore than three years prior to the year specified inthe tables.

All summary measures are country data weightedby each country's share in the aggregate popula-tion.

Table 28. Health and nutrition

The estimates of population per physician and nursingperson are derived from World Health Organization(WHO) data. The data refer to a variety of years,generally no more than two years prior to the yearspecified. The figure for physicians, in addition tothe total number of registered practitioners in thecountry, includes medical assistants whose medi-cal training is less than that of qualified physicians,but who nevertheless dispense similar medicalservices, including simple operations. The num-bers include "barefoot doctors." Nursing personsinclude graduate, practical, assistant, and auxiliarynurses, as well as paraprofessional personnel suchas health workers, first aid workers, traditionalbirth attendants, etc. The inclusion of auxiliary andparaprofessional personnel provides more realisticestimates of available nursing care. Because defini-tions of doctors and nursing personnel varyandbecause the data shown are for a variety of yearsthe data for these two indicators are not strictlycomparable across countries.

The daily calorie supply per capita is calculated bydividing the calorie equivalent of the food suppliesin an economy by the population. Food suppliescomprise domestic production, imports less ex-ports, and changes in stocks; they exclude animalfeed, seeds for use in agriculture, and food lost inprocessing and distribution. These estimates arefrom the FAO.

The percentage of babies with low birth weightsrelates to children born weighing less than 2,500grams. Low birth weight is frequently associatedwith maternal malnutrition, and tends to raise therisk of infant mortality and to lead to poor growthin infancy and childhood, thus increasing the mci-244

dence of other forms of retarded development.The figures are derived from WHO and UNICEFsources and are based on national data. The dataare not strictly comparable across countries, asthey are compiled from a combination of surveysand administrative records and other suchsources.

The summary measures in this table are countryfigures weighted by each country's share in theaggregate population.

Table 29. Education

The data in this table refer to a variety of years,generally not more than two years distant fromthose specified, and are mostly from Unesco.However, disaggregated figures for males and fe-males sometimes refer to a year earlier than thatfor overall totals.

The data on primary school enrollments are esti-mates of children of all ages enrolled in primaryschool. Figures are expressed as the ratio of pupilsto the population of school-age children. Whilemany countries consider primary school age to be6 to 11 years, others do not. The differences incountry practices in the ages and duration ofschooling are reflected in the ratios given. Forsome countries with universal primary education,the gross enrollment ratios may exceed 100 percentbecause some pupils are younger or older than thecountry's standard primary school age. The dataon secondary school enrollments are calculated in thesame manner, but again the definition of second-ary school age differs among countries. It is mostcommonly considered 12 to 17 years. Late entry ofmore mature students, as well as repetition andthe phenomenon of bunching in final grades, caninfluence these ratios.

The tertiary enrollment ratio is calculated by divid-ing the number of pupils enrolled in all post-secondary schools and universities by the popula-tion in the 20-24 age group. Pupils attendingvocational schools, adult education programs, two-year community colleges, and distance educationcenters (primarily correspondence courses) are in-cluded. The distribution of pupils across these dif-ferent types of institutions varies among countries.The youth population, that is 20 to 24 years, is usedas the denominator since it represents an averagetertiary level cohort. Although in higher-incomecountries, youths age 18 to 19 may be enrolled in atertiary institution (and are included in the numera-tor), in both low- and middle-income and high-income economies, many people older than 25years are also enrolled in such institutions.

The summary measures in this table are countryenrollment rates weighted by each country's sharein the aggregate population.

Table 30. Income distribution and ICP estimatesof GDP

The data in this table refer to the distribution oftotal disposable household income accruing to per-centile groups of households ranked by totalhousehold income, and ICP estimates for GDP.

The first column presents preliminary results ofthe U.N. International Comparison Program (ICP),Phase V, for 1985. ICP recasts traditional nationalaccounts through special price collections and dis-aggregation of GDP by expenditure components.Reviewed ICP results are expected to be availableby the end of 1989. The figures given here are sub-ject to change and should be regarded as indicativeonly. ICP Phase V details are prepared by nationalstatistical offices and coordinated by the U.N. Sta-tistical Office (UNSO) with support from other in-ternational agencies, particularly the Statistical Of-fice of the European Communities (EUROSTAT)and the Organisation for Economic Co-operationand Development (OECD). The World Bank, theEconomic Commission for Europe (ECE), and theEconomic and Social Commission for Asia and thePacific (ESCAP) also contribute to this exercise.

A total of 64 countries participated in the ICPPhase V exercise but preliminary results are avail-able for only 57. For four of these countries(Bangladesh, Nepal, Pakistan, and the Philip-pines), total GDP data were not available, andcomparisons were made for consumption only;two countries with populations of less than 1millionLuxembourg, with 81.3 as its estimatedindex of GDP per capita; and Swaziland, with13.6have been omitted from this table. Data forthe remaining seven countries, all Caribbean, areexpected later in the year.

Although the GDP per capita figures are pre-sented as indexes to the U.S. value, the underlyingdata are expressed in U.S. dollars. However, thesedollar values, which are different from thoseshown in Tables 1 and 3 (see the technical notes forthese tables), are obtained by special conversionfactors designed to equalize purchasing powers ofcurrencies in the respective countries. This conver-sion factor, commonly known as the purchasingpower parity (PPP), is defined as the number ofunits of a country's currency required to buy thesame amounts of goods and services in the domes-tic market as one dollar would buy in the UnitedStates. The computation of PPP involves obtaining

implicit quantities from national accounts expendi-ture data and specially collected price data, andrevaluing the implicit quantities in each country ata single set of average prices. The PPP rate thusequalizes dollar prices in every country, and inter-country comparisons of GDP based on them reflectdifferences in quantities of goods and services freeof any price level differentials. This procedure isdesigned to bring intercountry comparisons in linewith intertemporal real value comparisons that arebased on constant price series.

The figures presented here are the results of atwo-step exercise. Countries within a region orgroup such as the OECD are first compared usingtheir own group average prices. Next, since groupaverage prices may differ from each other, makingthe countries belonging to different groups notcomparable, the group prices are adjusted to makethem comparable at the world level. The adjust-ments, done by UNSO, are based on price differ-entials observed in a network of "link" countriesrepresenting each group. However, the linking isdone in a manner that retains in the world compar-ison the relative levels of GDP observed in thegroup comparisons.

The two-step process was adopted because therelative GDP levels and ranking of two countriesmay change when more countries are brought intothe comparison. It was felt that this should not beallowed to happen within geographic regions; thatis, that the relationship of, say, Ghana and Senegalshould not be affected by the prices prevailing inthe United States. Thus overall GDP per capitalevels are calculated at regional prices and thenlinked together. The linking is done by revaluingGDPs of all the countries at average "world"prices and allocating the new regional totals on thebasis of each country's share in the original re-gional total that was based on regional prices.

Such a method does not permit the comparisonof more detailed quantities (for example, food con-sumption). Thus these subaggregates and moredetailed categories are calculated by the worldprices. Therefore these quantities are indeed com-parable internationally, but they do not add up tothe indicated GDPs, because they are calculated ata different set of prices.

Some countries belong to several regionalgroups. Some groups have priority; others areequal. Thus fixity is always maintained betweenmembers of the European Communities, evenwithin the OECD and world comparison. For Fin-land and Austria, however, the bilateral relation-ship that prevails within the OECD comparison is

245

also the one used within the global comparison.However, a significantly different relationship(based on Central European prices) prevails in thecomparison within that group, and this is the rela-tionship presented in the separate publication ofthe European comparison.

For further details on the ICP procedures, read-ers may consult the ICP Phase IV report: WorldComparisons of Purchasing Power and Real Product for1980 (New York: United Nations, 1986).

The income distribution data cover rural and urbanareas and refer to different years between 1970 and1986. The data are drawn from a variety of sources,including the Economic Commission for LatinAmerica and the Caribbean (ECLAC), Economicand Social Commission for Asia and the Pacific(ESCAP), International Labour Office (ILO), theOrganisation for Economic Co-operation and De-velopment (OECD), the U.N. National Account Sta-tistics: Compendium of Income Distribution Statistics,1985, the World Bank, and national sources.

In many countries the collection of income distri-bution data is not systematically organized or inte-grated with the official statistical system. The dataare derived from surveys designed for other pur-poses, most often consumer expenditure surveys,that also collect some information on income.These surveys use a variety of income conceptsand sample designs, and in many cases their geo-graphic coverage is too limited to provide reliablenationwide estimates of income distribution.Therefore, while the estimates shown are consid-ered the best available, they do not avoid all theseproblems and should be interpreted with extremecaution.

The scope of the indicator is similarly limited.Because households vary in size, a distribution inwhich households are ranked according to per cap-ita household income, rather than according to to-tal household income, is superior for many pur-poses. The distinction is important becausehouseholds with low per capita incomes fre-quently are large households, whose total incomemay be high, while conversely many householdswith low household incomes may be small house-holds with high per capita incomes. Informationon the distribution of per capita household incomeexists for only a few countries and is infrequentlyupdated; for this reason this table is unchangedfrom last year's version. The World Bank's LivingStandards Measurement Study and the Social Di-mensions of Adjustment project, covering Sub-Saharan African countries, are assisting a few se-lected countries to improve their collection andanalysis of data on income distribution.

246

Table 31. Urbanization

The data on urban population as a percentage of totalpopulation are from the forthcoming U.N. publica-tion, The Prospects of World Urbanization, supple-mented by data from the World Bank.

The growth rates of urban population are calcu-lated from the World Bank's population estimates;the estimates of urban population shares are calcu-lated from the sources cited above. Data on urbanagglomeration in large cities are from the U.N. Pat-terns of Urban and Rural Population Growth, 1980.

Because the estimates in this table are based ondifferent national definitions of what is urban,cross-country comparisons should be interpretedwith caution. Data on urban agglomeration inlarge cities are from population censuses, whichare conducted at five- or even ten-year intervals.

The summary measures for urban population as apercentage of total population are calculated fromcountry percentages weighted by each country'sshare in the aggregate population; the other sum-mary measures in this table are weighted in thesame fashion, using urban population.

Table 32. Women in development

This table provides some basic indicators disaggre-gated to show differences between the sexes to il-lustrate the condition of women in society. It re-flects their demographic status and their access tosome health and education services. Statisticalanomalies become even more apparent when so-cial indicators are analyzed by gender, because re-porting systems are often weak in areas relatedspecifically to women. Indicators drawn from cen-suses and surveys, such as those on population,tend to be about as reliable for women as for men;but indicators based largely on administrativerecords, such as maternal and infant mortality, areless reliable. Currently more resources are beingdevoted to developing better statistics on thistopic, but the reliability of data, even in the seriesshown, still varies significantly.

The first four columns show the ratios of femalesto males for the total population and for the under-five age group. In general, throughout the world,more males are born than females. Under goodnutritional and health conditions and in times ofpeace, male children have a higher death rate thanfemales, and females tend to live longer. In theindustrial market economies, these factors have re-sulted in ratios of about 103 to 105 females per 100males in the general population. The figures inthese columns reveal that there are cases where

the number of females is much smaller than whatwould be a normal demographic pattern. In somecountries, the apparent imbalance may be theresult of migration (for example, Kuwait andUnited Arab Emirates), where males enter thecountry to work on contracts. In others, male out-migration or the disproportionate effect of war cre-ates a reverse imbalance of fewer than expectedmales and may partly hide, or compensate for, theexcessive female mortality.

Typically, however, in the absence of such fac-tors, a female-to-male ratio significantly below 100in the general population of a country reflects theeffects of discrimination against women. Such dis-crimination affects mostly three age groups: veryyoung girls, who may get a smaller share of scarcefood or receive less prompt costly medical atten-tion; childbearing women; and to a lesser extentthe resourceless elderly. This pattern of discrimina-tion is not uniformly associated with development.There are low- and middle-income countries (andwithin countries, regions) where the compositionof the population is quite "normal." In many oth-ers, however, the numbers starkly demonstrate theneed to associate women more closely with devel-opment.

The health and welfare indicators in the next fivecolumns draw attention, in particular, to the condi-tions associated with childbearing. This activitystill carries the highest risk of death for women ofreproductive age in developing countries. The in-dicators reflect, but do not measure, both the avail-ability of health services for women and the gene-ral welfare and nutritional status of mothers.

Life expectancy at birth is defined in the note toTable 1.

Births attended by health staff show the percentageof births recorded where a recognized health ser-vice worker was in attendance. The data are fromthe World Health Organization (WHO) and sup-plemented by UNICEF data. Maternal mortalityusually refers to the number of female deaths thatoccur during childbirth, per 100,000 live births. Be-cause "childbirth" is defined more widely in somecountries, to include complications of pregnancyor of abortion, and since many pregnant womendie because of lack of suitable health care, maternalmortality is difficult to measure consistently andreliably across countries. The data in these two se-ries are drawn from diverse national sources andcollected by WHO, although many national ad-ministrative systems are weak and do not recordvital events in a systematic way. The data are de-

rived mostly from official community reports andhospital records, and some reflect only deaths inhospitals and other medical institutions. Some-times smaller private and rural hospitals are ex-cluded, and sometimes even relatively primitivelocal facilities are included. The coverage is there-fore not always comprehensive, and the figuresshould be treated with extreme caution.

Clearly, many maternal deaths go unrecorded,particularly in countries with remote rural popula-tions; this accounts for some of the very low num-bers shown in the table, especially for several Afri-can countries. Moreover, it is not clear whether anincrease in the number of mothers in hospitalsreflects more extensive medical care for women ormore complications in pregnancy and childbirthbecause of poor nutrition, for instance. (See Table28 for low birth weight data.)

These time series attempt to bring together read-ily available information not always presented ininternational publications. WHO warns that thereare "inevitably gaps" in the series, and it has in-vited countries to provide more comprehensive fig-ures. They are reproduced here, from the 1986WHO publication Maternal Mortality Rates, supple-mented by the UNICEF publication The State of theWorld's Children 1989, as part of the internationaleffort to highlight data in this field. The data referto any year from 1977 to 1984.

The infant mortality rate is the number of infantswho die before reaching one year of age, per thou-sand live births in a given year. The data are fromthe U.N. publication Mortality of Children under Age5: Projections, 1950-2025 as well as from the WorldBank.

The education indicators, based on Unescosources, show the extent to which females are en-rolled at school at both primary and secondary lev-els, compared with males. All things being equal,and opportunities being the same, the ratios forfemales should be close to 100. However, inequali-ties may cause the ratios to move in different direc-tions. For example, the number of females per 100males will rise at secondary school level if maleattendance declines more rapidly in the finalgrades because of males' greater job opportunities,conscription irto the army, or migration in searchof work. In addition, since the numbers in thesecolumns refer mainly to general secondary educa-tion, they do not capture those (mostly males) en-rolled in technical and vocational schools or in full-time apprenticeships, as in Eastern Europe.

247

248

Bibliography

7

Production U.N. Department of International Economic and Social Affairs. Various years. Statisticaland domestic Yearbook. New York.absorption U.N. Department of International Economic and Social Affairs. Various years. World Energy

Supplies. Statistical Papers, series J. New York.FAO, IMF, UNIDO, and World Bank data; and national sources.

Fiscal and International Monetary Fund. 1988. Government Finance Statistics Yearbook. Vol. XII.monetary . Various years. International Finance Statistics. Washington, D.C.accounts U.N. Department of International Economic and Social Affairs. Various Years. World Energy

Supplies. Statistical Papers, series J. New York.IMF data.

Trade and International Monetary Fund. Various years. International Financial Statistics. Washington,balance of D.C.payments U.N. Conference on Trade and Development. Various years. Handbook of International Trade

and Development Statistics. Geneva.U.N. Department of International Economic and Social Affairs. Various years. Monthly

Bulletin of Statistics. New York.Various years. Yearbook of International Trade Statistics. New York.

FAO, IMF, U.N., and World Bank data.

External Organisation for Economic Co-operation and Development. Various years. Developmentfinance Co-operation. Paris.

1987. Geographical Distribution of Financial Flows to Developing Countries. Paris.IMF, OECD, and World Bank data; and the World Bank Debtor Reporting System.

Human U.N. Department of International Economic and Social Affairs. Various years. Populationresources and Vital Statistics Report. New York.

1980. Patterns of Urban and Rural Population Growth. New York.1984. Recent Levels and Trends of Contraceptive Use as Assessed in 1983. New York.1988. Mortality of Children under Age 5: Projections 1950-2025. New York.Forthcoming. The Prospects of World Urbanization. New York.Updated printouts. World Population Prospects: 1988. New York.

Food and Agriculture Organization. 1981. Fertilizer Yearbook 1982. Rome.1983. Food Aid in Figures (December). Rome.

Institute for Resource Development/Westinghouse. 1987. Child Survival: Risks and the Roadto Health. Columbia, Md.

Sivard, Ruth. 1985. WomenA World Survey. Washington, D.C.: World Priorities.U.N. Department of International Economic and Social Affairs. Various years. Demographic

Yearbook. New York.Various years. Statistical Yearbook. New York.

U.N. Educational, Scientific, and Cultural Organization. Various years. Statistical Yearbook.Paris.

UNICEF. 1989. The State of the World's Children 1989. Oxford: Oxford University Press.World Health Organization. Various years. World Health Statistics Annual. Geneva.

1986. Maternal Mortality Rates: A Tabulation of Available Information, 2d edition.Geneva.

Various years. World Health Statistics Report. Geneva.FAO and World Bank data.

249

Country classifications: World Development Report 1988 and selected international organizations

250

World Development Report1988

International MonetaryFund

bUnited NationsUnited Nations Conferenceon Trade and Development

General Agreement onTariffs and Trade

Industrial market economies

OECD (excluding Greece,Portugal, and Turkey)

Industrial countries

North AmericaCanadaUSA

EuropeEC (excluding Greece

and Portugal)EFTA

AsiaJapan

OceaniaAustraliaNew Zealand

Developed market economies

Northern AmericaCanadaUSA

EuropeECEFTA

Other EuropeFaeroe IslandsGibraltarMalta

AfricaSouth Africa

AsiaIsraelJapan

OceaniaAustraliaNew Zealand

Developed market economies

North AmericaCanadaUSA

EuropeECEFTA

Other EuropeFaeroe IslandsGibraltar

AfricaSouth Africa

AsiaIsraelJapan

OceaniaAustraliaNew Zealand

Developed countries

North AmericaCanadaUSA

Western EuropeECEFTA

Other Western Europe

AfricaSouth Africa

AsiaAustraliaJapanNew Zealand

Developing economies

Latin America and theCaribbean

Europe (including Cyprus,Greece, Hungaiy, Malta,Poland, Portugal,Romania, Turkey, andYugoslavia)

Middle East and NorthAfrica

Sub-Saharan Africa

South AsiaEast Asia

Developing countries

Western Hemisphere

Europe

Middle East (includingEgypt)

Africa (including SouthAfrica)

Asia (excluding Middle Eastbut including Oceania)

Developing market economies

Americas (excludingNorthern America)

EuropeYugoslavia

AfricaNorthernOther

CEUCAECOWASRest of Africa (excluding

South Africa)

AsiaWestern AsiaOther Asia

Oceania

Developing market economies

AmericaCACMCARICOMLAIAOther

EuropeMaltaYugoslavia

AfricaNorthOther

CEPGLCEUCAECO WAS

Other (excluding SouthAfrica)

AsiaWestSouth and South-East

Oceania

Developing economies

Latin America

Middle East

Africa (excluding SouthAfrica)

Asia (excluding Australia,Japan, New Zealand, andChina and other Asiancentrally plannedeconomies)

High-income oil exporters Twelve major oil exportersc OPEC Major petroleum exporters'1

Nonreporting nonmembers USSR and other nonmembersnot included elsewhere

Centrally planned economies

0 0

Asia (including China)Europe and USSR (including

Hungary, Poland, andRomania)

Socialist countries

0

AsiaEastern Europe (including

Hungary, Poland, andRomania)

Eastern trading area

0

China and other Asiancentrally plannedeconomies

Eastern Europe and USSR(including Hungary,Poland, and Romania)

Country classifications (continued)

Notes: CACM, Central American Common Market; CARICOM, Caribbean Community; CEPGL, Communauté &onomique des pays des Grands Lacs(Economic Community of the Great Lakes Countries); CEUCA, Customs and Economic Union of Central Africa; EC, European Communities; ECOWAS,Economic Community of West African States; EFTA, European Free Trade Association; LAtA, Latin American Integration Association; OECD, Organisationfor Economic Co-operation and Development; OPEC, Organization of Petroleum Exporting Countries. For details, see the IMF's Directory ofRegionalEconomic Organizations and Intergovernmental Commodity and Development Organizations.

SeeWorld Development Report 1988, page xi, for details. For this year's groupings, see the "Definitions and data notes" at the front of this volume.The United Nations uses the detailed groupings shown for presenting many types of economic statistics. It uses more general geographical groupings for other

types of statisticsfor details, see the U. N. publication Standard Country or Area Codes for Statistical Use (series M, no. 49, rev. 2).Includes Algeria, Indonesia, Islamic Republic of Iran, Iraq, Kuwait, Libya, Nigeria, Oman, Qatar, Saudi Arabia, United Arab Emirates, and Venezuela.High-income and developing oil exporters (excluding Cameroon), Angola, and Egypt.IMF member countries whose per capita GDP, as estimated by the World Bank, did not exceed the equivalent of $425 in 1986.Includes Afghanistan, Bangladesh, Benin, Bhutan, Botswana, Burkina Faso, Burma, Burundi, Cape Verde, Central African Republic, Chad, Comoros,

Democratic Yemen, Djibouti. Equatorial Guinea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti, Kiribati, Lao People's Democratic Republic, Lesotho,Malawi, Maldives, Mali, Mauritania, Mozambique, Nepal, Niger, Rwanda, Samoa, São Tome and Principe, Sierra Leone, Somalia, Sudan, Togo, Tuvalu,Uganda, United Republic of Tanzania, Vanuatu, and Yemen.

Twelve major oil exporters plus Cameroon, Congo, Ecuador, Gabon, Mexico, and Trinidad and Tobago.Exporters of manufactures and Turkey.

Includes Argentina, Brazil, Hong Kong, Korea, Singapore, Taiwan Province of China, Turkey, and Yugoslavia.Highly indebted countries, excluding Costa Rica and Jamaica.Sub-Saharan Africa excluding Nigeria.

251

World Development Report1988

International MonetaryFund

United Nations b United Nations Conferenceon Trade and Development

General Agreement onTariffs and Trade

Other analylical groups

Developing economies

Low-incomeChina and IndiaOther low-income

Middle-incomeLower middle-incomeUpper middle-income

Oil exporterau

Exportera of manufacturesaHighly indebted countriesaSub-Saharan Africa'

Developing countries

Low-income countries,excluding China andIndiau

Oil exporterssExporters of manufactures"Fifteen heavily indebted

countriesSub-Saharan Afric&'

Developing countries

Least developed countries

Developing countries

Least developed countries

Income groups based on 1980GDP per capita:

less than $500$500 to $1,500more than $1,500

Major exporters ofmanufactures

Developing economies

Least developed countries

Fifteen highly indebtedcountries

The World Bank

Development strategies in the 1960s and 1970s influenced the shape offinancial systems in developing countries. In many countries the growth ofrobust and efficient financial structures was retarded by government inter-vention that was designed to direct credit to priority sectors and to keepinterest rates artificially low. Today, as many countries revise their ap-proach to development to rely more on the private sector and on marketforces, the need for financial reform has become clear. The necessarychanges in policies and in financial institutions, instruments, andmarketschanges that offer countries an opportunity to fashion financialsystems capable of providing the services their economies will need in thefutureare the subject of this twelfth annual World Development Report.

The Report reviews the financial history of both high-income and devel-oping countries, including the policies and events leading to the presentdistress of so many financial intermediaries. It then considers the prereq-uisites for the development of more efficient financial systems: [11 Restruc-turing troubled banks and the unprofitable firms that have borrowed fromthem Restoring macroeconomic stability Strengthening the legal,accounting, and regulatory frameworks of finance LI Improving the man-agement of institutions LII Developing a more diverse set of institutionsand markets. The Report also reviews the attempts at financial liberaliza-tion made by some countries.

Like its predecessors, the Report contains an overview of recent develop-ments in the world economy and a World Development Indicators annexwith comprehensive, up-to-date data on social and economic developmentin more than 120 countries. These data are also available on diskette foruse with personal computers.

Cover design by Walt Rosen quist

ISBN 0-19-520788-2 (PB)ISSN 0163-5085

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